XYZ Ltd. is a company manufacturing standardized chandeliers. The segment they deal in is more or less an oligopolistic kind of market with mediocre market potential. The demand of their product had been wavering in past

CS Executive · Corporate Accounting and Financial Management · PYQS · December 2023
XYZ Ltd. is a company manufacturing standardized chandeliers. The segment they deal in is more or less an oligopolistic kind of market with mediocre market potential. The demand of their product had been wavering in past, but owing to increasing economic level of middle class in India, the board of directors is confident of brighter days in future. On 1st April, 2023, the board of directors of the company is desirous of knowing the amount of working capital that will be required to meet the planned level of operations during the year 2023-24. Following details have been provided in this regard : Issued share capital: ₹ 2 Crore 10% Debentures: ₹ 50 Lakh Fixed Assets (1st April, 2023): ₹ 1.25 Crore Production and sales during the year 2023-24 is expected to average out to 500 units per month. During the previous year, the ratios of cost to selling price, which are also likely to be maintained in current year as well, were as follows: Raw Materials : 60% Direct Wages : 10% Overheads : 20% Following additional information has been provided in this regard : (1) Raw materials and components are expected to remain in store for an average period of two months before being issued to assembly and production. (2) Each unit of product is expected to be in process for 15 days. (3) Finished goods stay in warehouse for an average period of 1 month before being dispatches to customers. (4) Suppliers of raw material components extend an average credit of 1.5 month. (5) 80% sales are credit and though credit extended to customers is two months, average credit collection period is 75 days. (6) On an average, overheads of 2 weeks remain outstanding. (7) Selling price per unit is ₹ 5,000. (8) Work-in-progress, cost involves 100% of material and 50% of labour and overheads. (9) Sundry debtors to be valued at cash cost. Entire overhead cost is assumed to be cash cost. (10) One year is equal to 360 days or 52 weeks. (11) Assuming production and sales follow a constant pattern. You are required to: Prepare an estimate of working capital required by the company for the ensuing year. Add 10% of your calculated figure for contingencies.

Answer & Explanation:

Statement of Estimated Working Capital by XYZ Ltd. Working Notes: (i) Annual Production = 500 units/month × 12 months = 6,000 Units (ii) Per unit costs (based on selling price ₹ 5,000): Raw material = ₹ 5,000 × 60% = ₹ 3,000 Direct Wages = ₹ 5,000 × 10% = ₹ 500 Overhead = ₹ 5,000 × 20% = ₹ 1,000 Total Cost per unit = ₹ 3,000 + ₹ 500 + ₹ 1,000 = ₹ 4,500 Particulars Calculation Amount (₹) Total (₹) Current Assets: Inventory: Raw material 6,000 units × ₹ 3,000 × (2/12) 30,00,000 Work-in Process (100% Material, 50% Labour & Overhead) 6,000 units × (₹ 3,000 + ₹ 500 × 0.5 + ₹ 1,000 × 0.5) × (15/360) = 6,000 × (3,000 + 250 + 500) × (15/360) = 6,000 × 3,750 × (15/360) 9,37,500 Finished Goods 6,000 units × (₹ 3,000 + ₹ 500 + ₹ 1,000) × (1/12) = 6,000 × 4,500 × (1/12) 22,50,000 Total Inventory 61,87,500 Sundry Debtors (80% sales on cash cost, 75 days collection) (6,000 units × ₹ 4,500 × 0.80) × (75/360) = (2,16,00,000 × 0.80) × (75/360) = 1,72,80,000 × (75/360) 45,00,000 45,00,000 Total Current Assets 1,06,87,500 Less : Current Liabilities: Sundry Creditors (Raw material cost, 1.5 months credit) 6,000 units × ₹ 3,000 × (1.5/12) (22,50,000) (22,50,000) Outstanding Overheads (Overhead cost, 2 weeks outstanding) 6,000 units × ₹ 1,000 × (2/52) (2,30,769) (2,30,769) Balance (Working Capital before contingencies) 82,06,731 Add: 10% for contingencies 8,20,673 ESTIMATED WORKING CAPITAL REQUIRED 90,27,404

Topics: Financial Management

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