fm09-ch 27
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CHAPTER 27
Principles of Working Capital
Problem 1
(Rs crore)
19X1 19X2 19X3(1) Raw material consumed 24.0 32.7 44.0(2) Raw material inventory 6.8 7.6 9.2(3) Raw material conversion period (days) 102.0 84.0 75.0(4) Cost of production 36.9 49.2 66.2(5) Work-in-process inventory 2.0 3.1 4.6(6) Work-in-process conversion period (days) 20.0 23.0 25.0(7) Cost of goods sold 37.3 48.4 66.9(8) Finished goods inventory 2.8 3.6 2.9(9) Finished goods conversion period (days) 27.0 27.0 16.0(10) Cost of sales 38.6 50.3 69.0(11) Debtors 10.8 14.9 20.5(12) Debtors conversion period (days) 101.0 107.0 107.0(13) Purchases 25.6 33.5 45.6(14) Creditors 4.6 8.0 12.0(15) Payment deferral period (days) 65.0 86.0 95.0
Gross operating cycle (days) 249.0 240.0 223.0Net operating cycle (days) 185.0 154.0 128.0
Problem 2
Weeks Months Annual Average
Current assets: (Rs) (Rs)
Stock of finished goods 5,000 5,000Stock of stores, materials etc. 8,000 8,000Debtors
Inland sales 6.0 312,000 36,000Export sales 1.5 78,000 2,250
Advance payment for sundry exp. Quarterly 8,000 2,000
Total current assets 53,250
Current liabilities:
Wages 1.5 260,000 7,500Stocks, materials, etc. 1.5 48,000 1,385Rent, royalties etc. 6.0 10,000 5,000Clerical staff 0.5 62,000 2,583Manager 0.5 4,800 200Misc. 1.5 48,000 6,000
Total current liabilities 22,668
Working capital 30,582
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Problem 3
Per unit Total
Raw material 80 8,320,000Direct labour 30 3,120,000Overheads 60 6,240,000
Total cost 170 17,680,000Profit 30 3,120,000
Selling price 200 20,800,000
Units produced & sold 104,000
Cash sales 5,200,000Credit sales 15,600,000Raw material consumption 8,320,000Cost of production 17,680,000
Current assets: Days Amount
Raw material inventory 30 693,333Materials in process 15 736,667Finished goods 30 1,473,333Debtors 60 2,946,667Cash balance 25,000
Total current assets 5,875,000
Current liabilities:
Creditors 30 693,333Wages 10 86,667Overheads 30 520,000
Total current liabilities 1,300,000
4,575,000
Add: 10% contingencies 457,500 Net working capital 5,032,500
Problem 4
Per unit Total
Raw material 42.4 4,240,000Direct labour 15.9 1,590,000Overheads 31.8 3,180,000Total cost 90.1 9,010,000Profit 15.9 1,590,000Selling price 106 10,600,000
Units produced & sold 100,000Sales 10,600,000Raw material consumption 4,240,000Cost of production 9,010,000
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Current assets: Weeks Amount
Raw material inventory 4 326,154Materials in process 2 346,538Finished goods 4 693,077Debtors 8 1,630,769
Cash balance (given) 125,000Total current assets 3,121,538
Current liabilities:
Creditors 4 326,154Wages 1 1/2 45,865
Total current liabilities 372,019
2,749,519Add: 10% contingencies 274,952
Net working capital 3,024,471
Problem 5
(Rs 000)
CA/FA Cost of liquidity Cost of illiquidity Total cost
0.10 138 2,200 2,3380.25 275 1,650 1,9250.40 550 1,100 1,6500.70 1,100 830 1,9301.00 2,200 690 2,8901.50 4,140 550 4,6902.50 6,890 276 7,166
Cost tradeoff
01,0002,000
3,0004,0005,0006,000
7,0008,000
0.10 0.25 0.40 0.70 1.00 1.50 2.50CA/FA
C o s t s
Total cost
Cost of liq
Cost of illiq
Cost of illiq
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Problem 6
Net
Month WC LTD Int. exp. Invst. Int. inc. int.
January 72.65 92.02 1.07 19.37 0.19 0.88February 58.13 92.02 1.07 33.89 0.34 0.73
March 29.06 92.02 1.07 62.96 0.63 0.44April 24.22 92.02 1.07 67.80 0.68 0.40May 33.90 92.02 1.07 58.12 0.58 0.49June 43.60 92.02 1.07 48.42 0.48 0.59July 58.12 92.02 1.07 33.90 0.34 0.73August 72.66 92.02 1.07 19.36 0.19 0.88September 82.30 92.02 1.07 9.72 0.10 0.98October 87.19 92.02 1.07 4.83 0.05 1.03November 92.02 92.02 1.07 0.00 0.00 1.07December 87.17 92.02 1.07 4.85 0.05 1.03
12.88 3.63 9.25
Long-term interest rate: annual 14.00%
Long-term interest rate: monthly 1.17%Inter-corporate lending rate: annual 12.00%Inter-corporate lending rate:monthly
1.00%
Short-term InterestMonth WC Borrowing expense
January 72.65 72.65 0.97February 58.13 58.13 0.78March 29.06 29.06 0.39April 24.22 24.22 0.32May 33.90 33.90 0.45
June 43.60 43.60 0.58July 58.12 58.12 0.77August 72.66 72.66 0.97September 82.30 82.30 1.10October 87.19 87.19 1.16November 92.02 92.02 1.23December 87.17 87.17 1.16
9.88
Short-term interest rate: annual 16.00%Short-term interest rate: monthly 1.33%
Net interest payment is lower when the company goes for long-term debt.
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