AKQJ Ltd. sells goods on a gross profit of 25%. Depreciation is considered as a part of cost of production. The following are the annual figures given to you: Sales (Debtors: 2 Months of Cost of Sales) ₹18,00,000 Materia

To estimate the working capital requirements, we first need to determine the cost of sales and then calculate the various current assets and current liabilities. 1. Calculation of Cost of Sales: Sales = ₹18,00,000 Gross Profit = 25% of Sales = 0.25 × ₹18,00,000 = ₹4,50,000 Cost of Production / Cost of Sales = Sales - Gross Profit = ₹18,00,000 - ₹4,50,000 = ₹13,50,000 Breakdown of Cost of Production: Materials consumed = ₹4,50,000 Wages paid = ₹3,60,000 Cash manufacturing expenses = ₹4,80,000 Total = ₹4,50,000 + ₹3,60,000 + ₹4,80,000 = ₹12,90,000 Depreciation (part of cost of production) = Cost of Production - (Materials + Wages + Cash Mfg. Exp.) = ₹13,50,000 - ₹12,90,000 = ₹60,000 Total Cash Cost of Sales: Cost of Production = ₹13,50,000 Less: Depreciation (Non-cash item) = ₹60,000 Cash Cost of Production = ₹12,90,000 Add: Administrative Expenses = ₹1,20,000 Add: Sales Promotion Expenses = ₹60,000 Total Cash Cost of Sales = ₹12,90,000 + ₹1,20,000 + ₹60,000 = ₹14,70,000 2. Estimation of Current Assets: Particulars Calculation Amount (₹) Minimum Cash Balance Given 1,00,000 Debtors 2 months of Cash Cost of Sales = (₹14,70,000 / 12) × 2 2,45,000 Prepaid Sales Promotion Expenses Paid quarterly in advance = (₹60,000 / 4) × 1 (for 1 quarter advance) 15,000 Stock of Raw Materials 1 month of Materials Consumed = (₹4,50,000 / 12) × 1 37,500 Stock of Finished Goods 1 month of Cash Cost of Production = (₹12,90,000 / 12) × 1 1,07,500 Total Current Assets 5,05,000 3. Estimation of Current Liabilities: Particulars Calculation Amount (₹) Sundry Creditors (for Materials) 1 month credit for Materials = (₹4,50,000 / 12) × 1 37,500 Outstanding Manufacturing Expenses 1 month lag in payment = (₹4,80,000 / 12) × 1 40,000 Outstanding Administrative Expenses 1 month lag in payment = (₹1,20,000 / 12) × 1 10,000 Outstanding Wages 1 month lag in payment = (₹3,60,000 / 12) × 1 30,000 Total Current Liabilities 1,17,500 4. Net Working Capital (before safety margin): Net Working Capital = Total Current Assets - Total Current Liabilities = ₹5,05,000 - ₹1,17,500 = ₹3,87,500 5. Add Safety Margin: Safety Margin = 15% of Net Working Capital = 15% of ₹3,87,500 = ₹58,125 6. Total Working Capital Requirements: Total Working Capital = Net Working Capital + Safety Margin = ₹3,87,500 + ₹58,125 = ₹4,45,625 Therefore, the estimated working capital requirements of the company on a cash cost basis, assuming a 15% safety margin, are ₹4,45,625 .