MODULE 5 Problems Problem 1: The following information is available for NCEP Limited.

Profit and Loss Account Data Sales 6000 Cost of goods sold 4000 Balance Sheet Data Beginning of 2011 Inventory 800 Accounts receivable 500 Accounts payable 290 What is the duration of the operating cycle and cash cycle? Problem 2: The following information is available for ABC Limited. Profit and Loss Account Data Sales 3000 Cost of goods sold 1800 Balance Sheet Data Beginning of 2011 Inventory 300 Accounts receivable 180 Accounts payable 85 What is the duration of the operating cycle and cash cycle?

End of 2011 820 490 205

End of 2011 310 170 95

Problem 3: The following annual figures relate to XYZ Limited: Rs. Sales (at two months' credit) 6,000,000 Materials consumed (suppliers extend 2 months credit) 1,600,000 Wages paid (monthly in arrear) 1,300,000 Manufacturing expenses outstanding at the end of the year (Cash expenses are paid one month in arrear) 140,000 Total administrative expenses, paid as incurred 440,000 Sales promotion expenses, paid quarterly in advance 200,000 The company sells its products on gross profit of 20% counting depreciation as part of the cost of production. It keeps one month's stock each of raw materials and finished goods, and a cash balance of Rs.200,000. Assuming a 25 % safety margin, work out the working capital requirements of the company on cash cost basis. Problem 4: The following annual figures relate to XYZ Limited. Rs. Sales (at three months' credit) 8,000,000 Materials consumed (suppliers extend 1 months credit) 2,000,000 Wages paid (monthly in arrear) 1,600,000 Manufacturing expenses outstanding at the end of the year (Cash expenses are paid one month in arrear) 100,000 Total administrative expenses, paid as incurred 500,000 Sales promotion expenses, paid quarterly in arrears 400,000 The company sells its products on gross profit of 30 percent counting depreciation as part of the cost of production. It keeps two months stock each of raw materials and finished goods, and a cash balance of Rs.300,000. Assuming a 20 % safety margin, work out the working capital requirements of the company on cash cost basis. Ignore work-inprocess.

Problem 5 : A proforma cost sheet of a company provides the following particulars: Raw materials Rs 80 Direct labour 30 Overhead 60 Total cost 170 Profit 30 Selling price 200 The following further particulars are available: Raw materials in stock, on average, one month; Materials in process (completion stage, 50 per cent), on average, half a month; Finished goods in stock, on average, one month. Credit allowed by suppliers is one month; Credit allowed to debtors is two months; Average time-lag in payment of wages is 1.5 weeks and one month in overhead expenses; one-fourth of the output is sold against cash; cash in hand and at bank is desired to be mantained at Rs 3,65,000. You are required to prepare a statement showing the working capital needed to finance a level of activity of 1,04,000 units of production. You may assume that production is carried on evenly throughout the year, and wages and overheads accrue similarly. For calculation purposes, 4 weeks may be taken as equivalent to a month. Problem 6 : Foods Ltd is presently operating at 60 per cent level, producing 36,000 packets of snack foods and proposes to increase its capacity utilisation in the coming year by 33.33 per cent over the existing level of production. The following data has been supplied: (i) Unit cost structure of the product at current level: Raw material Rs 4 Wages (variable) 2 Overheads (variable) 2 Fixed overhead 1 Profit 3 Selling price 12 Raw materials will remain in stores for 1 month before being issued for production. Material will remain in process for further 1 month. Suppliers grant 3 months credit to the company. Finished goods remain in godown for 1 month. Debtors are allowed credit for 2 months. Average time-lag in wages and overhead payments is 1 month and these expenses accrue evenly throughout the production cycle. No increase either in cost of inputs or selling price is envisaged. Prepare a projected profitability statement and a statement showing working capital requirement at the new level, assuming that a minimum cash balance of Rs 19,500 has to be maintained. Problem 7: Estimate the amount of working capital that will be required for the year: (i) Issued and paid-up capital, Rs 2,00,000. (ii) 5% Debentures (secured on assets), Rs 50,000. (iii) Fixed assets valued at Rs 1,25,000 on March 31 of the previous year. (iv) Production during the previous year was 60,000 units; it is planned that this level of activity should be maintained during the present year. (v) The expected ratios of cost to selling price are - raw materials 60 per cent, direct wages 10 per cent and overheads 20 per cent. (vi) Raw materials are expected to remain in store for an average of two months before these are issued for production. (vii) Each unit of production is expected to be in process for one month. Full unit of raw materials is required in the beginning of production. (viii) Finished goods will stay in warehouse for approximately three months. (ix) Creditors allow credit for 2 months from the date of delivery of raw materials. (x) Credit allowed to debtors is 3 months from the date of dispatch. (xi) Selling price is Rs 5.

Problem 8: You are supplied with the following information of XYZ Ltd : Production of the year, 69,000 units Finished goods in store, 3 months Raw material in store, 2 months consumption Production process, 1 month Credit allowed by creditors, 2 months Credit given to debtors, 3 months Selling price per unit, Rs 50 Raw material, 50 per cent of selling price Direct wages, 10 per cent of selling price Manufacturing and administrative overheads, 16 per cent of selling price Selling overheads, 4 per cent of selling price There is a regular production and sales cycle and wages overheads accrue evenly. Wages are paid in the next month of accrual. Material is introduced in the beginning of the production cycle. You are required to ascertain its working capital requirement. Problem 9: A co is desirous of purchasing a business and has consulted you and one point on which you are asked to advise them is the average amount of working capital which will be required in the 1 st years working. You are given the following estimates and are instructed to add 10% to your computed figure to allow for contingencies. Details 1)Amount blocked up in stocks: Stock of finished goods 5000 Stock of stores,materials 8000 2)Average credit sales: Inland sales 6weeks credit 312000 Export sales 1 months credit 78000 3)Lag in payment of wages and other out goings: Wages 1 weeks 260000 Stock of materials 1 months 48000 Rent,royalties -6 months 10000 Clerical staff half month 62400 Manager half month 4800 Miscellaneous expenses-1 month 48000 4)Payment in advances Sundry expenses(paid quarterly in advance) 8000 5)Undrawn profit on the average through out the year 11000 Problem 10: A Performa cost sheet of R.R & co .ltd, provides the following information. You are required to estimate the working capital needed to finance, a level of activity of 52,000 units of production. Additional information: Average raw materials in stock : One month Average materials-in-process(50% completion stage): Half a month Average finished goods in stock : One month Credit allowed by supplier: One month Credit allowed to customers : Two months Time lag in payments of wages: One & half weeks. Time lag in payments of overhead expense: One month. Half of the sale is on cash basis. Cash balance is expected to be Rs 12500/-. You may assume that production is carried on evenly throughout the year and wages and overhead expenses accrue similarly contingency is 10%.