Question 5 (b)
Net operating cycle, number of cycles and working capital
9 marks
- Time to write
- About 18 minutes
- Topic
- Working capital
Question
Question 5 (b) · 9 marksUsing the information given below, calculate the figures required (9)
- Period of the net operating cycle
- Number of operating cycles in one year
- The working capital amount
Period covered – 360 days Average period granted by suppliers – 30 days Average period granted to debtors – 45 days Raw materials consumed during the year – ₹7,20,000 Average stock of raw materials – ₹60,000 Annual work in progress inventory – ₹6,00,000 Average WIP inventory – ₹36,000 Annual Finished goods inventory – ₹9,60,000 Total cost of sales – ₹10,08,000 Average finished goods stock held – ₹48,000
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
Read from the question
- calculateFormula first, then the working, then the answer with its unit (₹, %, units).
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Periods of each stage 4 marks 7 min
- 2 (i) Net operating cycle 2 marks 4 min
- 3 (ii) Number of cycles 1 mark 2 min
- 4 (iii) Working capital 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 18 minutes for 9 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.
Each stage of the operating cycle is the average stock held divided by the daily amount passing through that stage; the net cycle adds the stages and the debtors' period and deducts the credit from suppliers.
1The carpenter's cash becomes a cartload of timber.
Raw material storage periodCash is turned into raw materials.
2Saw and hammer turn the timber into half-made chairs.
Conversion (work-in-progress) periodRaw materials into work-in-progress.
3The finished chairs line the store room, ready.
Finished goods storage periodWork-in-progress into finished goods.
4The chairs go out on credit, and Lakshmi's notebook follows the money home.
Debtors' collection periodFinished goods into debtors and debtors back into cash.
(i) Net operating cycle (360 days)
| Stage | Working | Days |
|---|---|---|
| Raw material storage period | 60,000 ÷ (7,20,000 ÷ 360) | 30 |
| Work-in-progress conversion period | 36,000 ÷ (6,00,000 ÷ 360) | 21.6 |
| Finished goods storage period | 48,000 ÷ (9,60,000 ÷ 360) | 18 |
| Debtors' collection period | given | 45 |
| Gross operating cycle | 114.6 | |
| Less: creditors' payment period | given | 30 |
| Net operating cycle | 84.6 |
(ii) Number of operating cycles in a year = 360 ÷ 84.6 = 4.2553.
(iii) Working capital amount (paper note: total cost of sales ÷ number of operating cycles) = 10,08,000 ÷ 4.2553 = ₹2,36,880. Equivalently, 10,08,000 × 84.6 ÷ 360 = ₹2,36,880.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Periods of each stage | 4 |
| 2 | (i) Net operating cycle | 2 |
| 3 | (ii) Number of cycles | 1 |
| 4 | (iii) Working capital | 2 |
| Total | 9 |
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