Question 5 (a)

Net working capital on the cash cost basis

12 marks

Time to write
About 24 minutes
Topic
Working capital

Question

Question 5 (a) · 12 marks

Lumina Ltd. gives you the facts below. Estimate the net working capital needed for TVM's project, given that the estimated production cost per unit is as follows:

Raw material₹192
Direct labor₹72
Overheads (Including depreciation of ₹24 per unit)₹168
Total₹432

Other information:

  1. Selling price: ₹480 per unit

  2. Activity level: 78,000 units of production a year

  3. Raw material held in stock: 4 weeks on average

  4. Work-in-progress (assume 50% completion as regards conversion cost and 100% completion as regards material): 2 weeks on average

  5. Finished goods held in stock: 4 weeks on average

  6. Credit given by suppliers: 4 weeks on average

  7. Credit given to debtors: 8 weeks on average

  8. Lag in paying wages: 1.5 weeks on average

  9. Expected cash at the bank: ₹60,000

You may assume that production takes place evenly over the year. All sales are made on credit. Add 10% to the figure you compute, to allow for contingencies.

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

24 minfor 12 marks

Read from the question

  • assume 50% completion as regards conversion…The paper fixes this: use it as given, and say so in your answer.
  • EstimateFormula first, then the working, then the answer with its unit (₹, %, units).

Write it in this order

  1. Read the data; note exactly what is asked 2 min
  2. 1 Cash cost per unit and weekly output 2 marks 3 min
  3. 2 Raw material and work-in-progress 3 marks 5 min
  4. 3 Finished goods and debtors at cash cost 3 marks 5 min
  5. 4 Current liabilities 2 marks 3 min
  6. 5 Contingency and total 2 marks 3 min
  7. Check: arithmetic, units (₹, %), final answer underlined 3 min

Try it first. About 24 minutes for 12 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Basis. Working capital is estimated on the cash cost basis: finished goods and debtors are taken at cash cost, since the funds tied up in them exclude profit, and depreciation, a non-cash cost, is left out. Each element is the weekly cost tied up × the weeks it is held, as in the DU text's weekly working. Production is even, so weekly output = 78,000 ÷ 52 = 1,500 units.

Cash cost per unit: raw material ₹192 + direct labour ₹72 + overheads excluding depreciation (168 − 24) ₹144 = ₹408.

Statement of working capital requirement

ParticularsWorking₹
A. Current assets
Raw material stock (4 weeks)1,500 × 4 × 19211,52,000
Work-in-progress (2 weeks): materials (100%)1,500 × 2 × 1925,76,000
— conversion cost (50%): (72 + 144) × 50% = ₹1081,500 × 2 × 1083,24,000
Work-in-progress total9,00,000
Finished goods (4 weeks, at cash cost ₹408)1,500 × 4 × 40824,48,000
Debtors (8 weeks, all sales on credit, at cash cost ₹408)1,500 × 8 × 40848,96,000
Cash at bank60,000
Total current assets94,56,000
B. Current liabilities
Creditors for raw material (4 weeks)1,500 × 4 × 19211,52,000
Wages outstanding (1.5 weeks)1,500 × 1.5 × 721,62,000
Total current liabilities13,14,000
Net working capital (A − B)81,42,000
Add: 10% for contingencies8,14,200
Net working capital required89,56,200

Note. On the total-cost basis instead (depreciation included in work-in-progress, finished goods and debtors), the requirement would be ₹94,71,000.

Where the 12 marks sit

#ComponentMarks
1Cash cost per unit and weekly output2
2Raw material and work-in-progress3
3Finished goods and debtors at cash cost3
4Current liabilities2
5Contingency and total2
Total12
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