WORKING CAPITAL MANAGEMENT – CLASSWORK QUESTIONS

Question 1

Question 2

The following are the extracts from the balance sheet of a company:
(Rs. In millions)

Particulars 1.1.2013 31.12.2013

Inventory / Stock 9 12
Accounts Receivable 12 16
Accounts Payable 7 10

Other information:
Sales for the year ending 31.12.2013 - Rs.80 million
Cost of goods sold - Rs.56 million

Calculate the length of Operating Cycle (Gross) and Cash Cycle (Net). Assume 365 days.

Question 3

The following are the extracts from the Balance sheet of a Company:

(Rs. In millions)
Particulars 1.1.2010 31.12.2010
Inventory 60 64
Accounts Receivable 80 88
Accounts Payable 40 46

Other information:
Sales for the year ending 31.12.2010 - Rs.500 million
Cost of goods sold - Rs.360 million

Calculate the length of Gross Operating Cycle & Net Operating Cycle. Assume 365 days.

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Question 4

The Prestopino Corporation is a leading U.S. producer of automobile batteries. Prestopino turns out 1,500
batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw
materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the
firm generally pays its suppliers in 30 days.

a. What is the length of Prestopino’s cash conversion cycle?

b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital
must it finance?

c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its
payables deferral period to 35 days?

d. Prestopino’s management is trying to analyze the effect of a proposed new production process on the
working capital investment. The new production process would allow Prestopino to decrease its inventory
conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new
process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect
the receivables collection period (40 days) or the payables deferral period (30 days), what will be the length
of the cash conversion cycle and the working capital financing requirement if the new production process is
implemented?

Question 5

A proforma cost sheet of a company provides the following information. You are required to estimate the
working capital required to produce 52,000 units.

Particulars Amount
Per Unit (Rs.)
Raw Materials 40
Direct Labor 15
Overheads (Excluding Depreciation) 30
Total Cost (Cost of Goods Sold) 85
Profit 30
Selling Price 115

Additional Information:

 Average raw materials in stock: 4 weeks

 Average materials in process (50% completion stage): 2 weeks
 Average finished goods in stock: 4 weeks
 Credit allowed by suppliers: 4 weeks
 Credit allowed to customers: 8 weeks
 Time lag in payment of overhead and other expenses: 4 weeks
 Half of the sales is on cash basis.
 Cash balance is expected to be Rs.12,500.

You may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.

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Question 6

On 1st January, the Managing Director of Naveen Ltd. wishes to know the amount of working capital that
will be required during the year. From the following information, prepare the working capital requirements
forecast.

Production during the previous year was 60,000 units. It is planned that this level of activity would be
maintained during the present year. The expected ratios of the cost to selling prices are Raw Materials 60%,
Direct Wages 10% and overheads 20%.

Raw materials are expected to remain in store for an average of 2 months before issue to production.
Each unit expected to be in process for one month, the raw materials being fed into the pipeline immediately
and the labor and overhead costs accruing evenly during the month. Finished goods will stay in the
warehouse awaiting dispatch to customers for approximately 3 months.

Credit allowed by creditors is 2 months from the date of delivery of raw material. Credit allowed to debtors
is 3 months from the date of dispatch.

Selling price is Rs.5 per unit. There is regular production and sales cycle. Wages and overheads are paid on
the 1st day of each month for previous month.
The company normally keeps cash in hand to the extent of Rs.20,000.

Question 7

Set up your calculation for the average amount of working capital required. You are given the following
estimate and are instructed to add 10% to your computed figure to allow for contingencies.

Particulars Amount for the year (Rs.)

i) Average amount backed up for stocks:
Stocks of finished product 5,000
Stocks of stores and materials 8,000
ii) Average credit given:
Inland sales, 6 weeks’ credit 3,12,000
Export sales, 1.5 week’s credit 78,000
iii) Average time lag in payment of wages and other outgoings:
Wages, 1.5 weeks 2,60,000
Stocks and materials, 1.5 months 48,000
Rent and royalties, 6 months 10,000
Clerical staff, 0.5 month 62,400
Manager, 0.5 month 4,800
Miscellaneous expenses, 1.5 months 48,000
iv) Payment in advance:
Sundry expenses (paid quarterly in advance) 8,000

Question 8

Compute the operating cycle in days from the following information extracted from the books of a
manufacturing company.
Period covered: 365 days
1. Average total of debtors = Rs. 4,80,000
2. Cost of raw materials Consumed = Rs. 44,00,000
3. Cost of WIP consumed = Rs. 1,00,00,000
4. Average cost of goods sold = Rs. 1,05,00,000
5. Average raw material stock = Rs. 3,20,000
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6. Average WIP in stock = Rs. 3,50,000
7. Average Finished goods in stock = Rs. 2,60,000
8. Total sales of the year = 1,60,00,000
9. Credit allowed by suppliers = 16

Question 9
From the following data of a trading company, compute the realization period. (Operating Cycle).

Particulars (Rs. In lakhs)

Average Inventories 13.00
Average Debtors 22.50
Average Creditors 14.00
Purchases 240.00
Cost of Goods Sold (COGS) 260.00
Sales 300.00

Question 10
A factory produces 96,000 units during the year and sells for 50 per units. Cost structure of product is as
follows:

Raw Materials: 60%

Labour: 15%
Direct Expenses: 10%
Profit: 15%
Selling price: 100%

The following additional information is available.

1. The activities of purchasing, producing and selling occur evenly throughout the year.
2. Raw materials equivalent to 1 month’s supply is stored in godown.
3. The production process takes 1 month.
4. Finished goods equal to three month’s production and carried in stock.
5. Debtors get 2 month’s credit.
6. Creditors allow 1.5 month’s credit.
7. Time lag in payment of wages and direct expenses in ½ month.
8. Cash and Bank balance is to be maintained at 10% of the working capital.
9. 10% of the sales are made at 10% above the normal selling price.
Draw a forecast of working capital requirements of the factory.

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Question 11
MNO ltd. manufactured and sold 30,000 units in the year 2013 at 100% capacity. Following information is
available for the same year.

Materials: 750,00,000
Labour: 300,00,000
Sales: 1500,00,000
Gross Profit: 20% on sales

Due to economic slowdown the company has decided to reduce it production to 50% of its capacity during
the year 2014. The following are the estimates:
a. Per unit price of raw material will reduce by 10%.
b. Wages p.u will be reduced by 20%
c. Direct expenses p.u will be increased by 10%
d. Selling price per unit to be estimated to maintain a profit on sales at 20%
e. Raw material will remain in stock for 1 month.
f. Finished goods will remain in stock for 2 months
g. Customers (at selling price) will enjoy 1 month credit
h. Suppliers will allow a credit period of 2 months
i. Time lag in payment of wages and direct expenses is 1 month
j. Processing period is 1 month
k. Cash & Bank Balances should be 30,00,000.
l. Add margin of safety 10%
You are required to forecast working capital requirement for the year 2014

Question 12
From the following details, prepare working capital estimate for 2014:
Raw material: Rs.125 per unit
Fixed Wages: Rs. 900,000 per annum
Variables Wages: Rs.40 per unit
Fixed direct expenses: Rs. 660,000 per annum
Variable direct expenses: Rs.9 per unit
Level of production and sales: 60,000 per annum

Other Information:
a. Raw material stock held for 1.5 months
b. Process time 1 month and include full fixed wages & expenses and 40% variable wages & expenses
c. Finished goods stock 1 month
d. MRP of the product is arrived by calculating 20% profit on sales price
e. 25% of the sales to wholesale given them 10% discount. Credit given to 40% wholesalers two
months against acceptance of bill and balance one month credit.
f. Balance sale to retailers. Half of it on cash basis by giving 2% discount and balance on one month
credit.
g. Cash required will be 15% of net working capital
h. For material purchased we accept a bill for two months for 25% of quantity and for the balance
receive a credit for 1.5 months.
i. Fixed wages are paid ½ month in advance
j. Fixed expenses are paid 1 month in advance
k. Variable wages time lag is one month
l. Variable expenses time lag is half month

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