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Working Capital Calculation Guide

X Ltd Co wants to calculate its working capital requirements using the operating cycle method. It produces 20,000 units per year that are sold for $5 each. Raw materials cost $2.5 per unit, labor costs $1 per unit, and overhead is $17,500 for the year. Customers are given 60 days credit while suppliers provide 50 days credit. 40 days of raw materials and 15 days of finished goods are kept in storage. The production cycle takes 20 days and new materials are issued at the start of each cycle. One-third of working capital is kept as cash for contingencies. The operating cycle is calculated to be 85 days, so there will be 4.3 cycles per year. Therefore, the

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195 views2 pages

Working Capital Calculation Guide

X Ltd Co wants to calculate its working capital requirements using the operating cycle method. It produces 20,000 units per year that are sold for $5 each. Raw materials cost $2.5 per unit, labor costs $1 per unit, and overhead is $17,500 for the year. Customers are given 60 days credit while suppliers provide 50 days credit. 40 days of raw materials and 15 days of finished goods are kept in storage. The production cycle takes 20 days and new materials are issued at the start of each cycle. One-third of working capital is kept as cash for contingencies. The operating cycle is calculated to be 85 days, so there will be 4.3 cycles per year. Therefore, the

Uploaded by

divya kalyani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem:

X Ltd Co. wants to know working capital by operating cycle methods when :


Estimated Sales 20,000 units @ $5 P.U.
Production and Sales will remain similar throughout the year.
Production costs: M – 2.5 P.U., Labour 1.00 P.U. Overheads $17.500.

Customers are given 60 days credit and 50 days credit from suppliers. 40 days supply of raw
materials and 15 days supply of finished goods are kept in store.
Production cycle is 20 days. All materials are issued at the commencement of each production
cycle. 1/3 on an Average of working capital is kept as cash balance for contingencies.
Solution:
(a). Total Op. Exp. for the
$
year.

R.M. 20,000 x 250 50,000

Labor 20,000 x 1 20,000

Overheads 17,500

87,500

(b). Period of Production


Days
cycle

Material storage days (Pds) 40

Finished goods storage pds. 15

Production cycle storage pds. 20

Av. collection pd. 60

135

Less: average payment (crs) 50

85
(c). No. of operating cycle in the year: 365 / 85 = 4.3

(d). Working Capital = 87,500 / 4.3 = $20,349

Add: Reserve for contingencies 1 / 3 = 6,789 / 27,132

2. Using Working Capital Method


Problem
$
Contingencies
Allowances = 15%
Raw Material (needed) 10,000
Calculate Amount of
Working Capital. Store Value 16,000

Average Credit givers:


Solution:
Current Assets: Local sales 2 weeks credit 1,56,000
$
Inven 1 Outside sales 6 weeks
6,24,000
tories 0, credit
: 0
R.M. 0 Time lag payment:
0
For purchase (4 weeks) 1,92,000
$
1 For wages (2 weeks) 5,20,000
Stoc
6,
k of $26,000
0
Store
0
0
Account Receivables (Drs)
Local sales = (1,56,000 x 2) / 52 = $6,000

Outside sales = (6 x 6,24,000) / 52 = $72,000

Less: Current Liabilities
Accounts Payables (Crs.) = (1,92,000 x 4) / 52 = $14,770

O/S Wages = (5,20,000 x 2) / 52 = $20,000

Add: 15% for contingencies = 10,385

Total Working Capital Required = $79,615

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