Problems on Working Capital Management
1. Following is the information of A Company for the year 3oth June 2020. Their plan is to sell
30,000 units in the year 2020-2021. The expected cost of goods sold is as under you are
required to calculate the working capital requirements.
Particulars Rs. (Per Unit)
Raw material 100
Manufacturing expenses 30
Selling, administration and financial expenses 20
Selling price 200
The duration at various stages of the operating cycle is expected to be as follows :
Raw material stage 2 months
Work-in-progress stage 1 month
Finished goods stage 1/2 month
Debtors stage 1 month
Assuming that the monthly sales level of 2,500 units, estimate the gross working capital
necessity. Expected cash balance is 5% of the gross working capital necessity, and working-
progress in 25% complete with respect to manufacturing expenses.
Solution:
In the books of A Company
Statement showing requirements of Working Capital
(For the period of 2020-21)
Particulars Amt. (Rs.) Amt.
(Rs.)
I Current Assets
Stock of Raw Material (2,500×2×100) 5,00,000
Work-in-progress
Raw Materials (2,500×100) 2,50,000
Manufacturing Expenses 25% of (2,500×30) 18,750 2,68,750
Finished Goods:
Raw Materials (2,500×½×100) 1,25,000
Manufacturing Expenses (2,500×½×30) 37,500 1,62,500
Debtors (2,500×150) 3,75,000
Total 13,06,250
Cash Balance (13,06,250×5/95) 68750
Net working capital requirement 13,75,000
Note: Selling, administration and financial expenses have not been incorporated in
valuation of closing stock.
2. Following is the information of C Ltd. for the year 31st March 2021. You are required to
calculate the working capital requirements from the following information:
Particulars Rs.
Raw materials 160
Direct labour 60
Overheads 120
Total cost 340
Profit 60
Selling price 400
Raw materials are held in stock on an average for 1 month period. Materials are in process on an
average for ½ month period. Finished goods are in stock on an average for 1 month period.
Credit allowed by suppliers is 1 month period and credit allowed to debtors is 2 month period.
Time lag in payment of wages is 1½ weeks. Time lag in payment of overhead expenses is 1
month. 1/4th of the sales are made on cash basis. Cash in hand and at the bank is anticipated to be
Rs. 50,000; and anticipated level of production Cash in hand and at the bank is anticipated to be
Rs. 50,000; and anticipated level of production amounts to 1,04,000 units for a year of 52 weeks.
You may assume that production is carried on evenly throughout the year and a time period of
four weeks is equivalent to a month.
Solution:
Particulars Rs. Rs.
I Current Assets:
Cash Balance 50,000
Stock of Raw Materials (2,000×160×4)
12,80,000
Work-in-progress :
Raw Materials
(2,000×160×2) 6,40,000
Labour and Overheads
(2,000×180×2)×50% 3,60,000 10,00,000
Finished Goods
(2,000×340×4) 27,20,000
Debtors (2,000×75%×340×8)
40,80,000
Total Current Assets 91,30,000
II Current Liabilities :
Creditors (2,000×Rs. 160×4)
12,80,000
Creditors for Wages
(2,000×Rs. 60×1½) 1,80,000
Creditors for Overheads (2,000×Rs.
120×4) 9,60,000
Total Current Liabilities 24,20,000
Net Working Capital (CA– CL)
67,10,000
