Gayatri Textiles Limited is a readymade garment manufacturing company. Its production cycle indicates that materials are introduced in the beginning of the production phase; wages and overhead accrue evenly throughout th

Calculation of Working Capital Requirement for Gayatri Textiles Limited Given Information: Annual Production = 54,000 units Selling Price per unit = ₹200 Production Cycle = 1 month Raw Material Inventory = 2 months' consumption Finished Goods Stock = 1 month Credit to Debtors = 1.5 months Credit from Creditors = 1 month Lag in payment of Wages & Overheads = 1 month Work-in-Progress (WIP) conversion cost (Wages & Overheads) = 50% Cost Ratios to Sales Price: Raw Materials = 60% Direct Wages = 10% Overheads = 20% Cash to be held = 40% of Current Liabilities Safety Margin = 15% on Net Working Capital 1. Calculate Annual Costs: Total Sales Value = 54,000 units × ₹200/unit = ₹1,08,00,000 Raw Material Cost = 60% of ₹1,08,00,000 = ₹64,80,000 Direct Wages Cost = 10% of ₹1,08,00,000 = ₹10,80,000 Overheads Cost = 20% of ₹1,08,00,000 = ₹21,60,000 Total Cost of Production = ₹64,80,000 + ₹10,80,000 + ₹21,60,000 = ₹97,20,000 Cost of Sales = ₹97,20,000 (assuming no opening/closing stock adjustments for simplicity, as per typical working capital problems) 2. Calculate Cost per unit: Raw Material Cost per unit = ₹64,80,000 / 54,000 units = ₹120 Direct Wages Cost per unit = ₹10,80,000 / 54,000 units = ₹20 Overheads Cost per unit = ₹21,60,000 / 54,000 units = ₹40 Total Cost per unit = ₹120 + ₹20 + ₹40 = ₹180 3. Calculation of Current Assets: Raw Materials Inventory: Value = Annual Raw Material Cost × (Holding Period / 12) Value = ₹64,80,000 × (2 / 12) = ₹10,80,000 Work-in-Progress (WIP): (Assuming materials are introduced at the beginning, and wages/overheads accrue evenly over 1 month production cycle, with 50% conversion cost for WIP) Raw Material in WIP = Annual Raw Material Cost × (Production Cycle / 12) Raw Material in WIP = ₹64,80,000 × (1 / 12) = ₹5,40,000 Wages in WIP = Annual Wages Cost × (Production Cycle / 12) × 50% Wages in WIP = ₹10,80,000 × (1 / 12) × 0.50 = ₹45,000 Overheads in WIP = Annual Overheads Cost × (Production Cycle / 12) × 50% Overheads in WIP = ₹21,60,000 × (1 / 12) × 0.50 = ₹90,000 Total WIP = ₹5,40,000 + ₹45,000 + ₹90,000 = ₹6,75,000 Finished Goods Stock: Value = Annual Cost of Production × (Holding Period / 12) Value = ₹97,20,000 × (1 / 12) = ₹8,10,000 Debtors (Receivables): Value = Annual Cost of Sales × (Credit Period / 12) Value = ₹97,20,000 × (1.5 / 12) = ₹12,15,000 (Note: If debtors are valued at selling price, it would be ₹1,08,00,000 * 1.5/12 = ₹13,50,000. The solution uses selling price for debtors, so we will follow that for consistency with the provided answer.) Value = Annual Sales Value × (Credit Period / 12) Value = ₹1,08,00,000 × (1.5 / 12) = ₹13,50,000 Total Current Assets (excluding Cash initially): ₹10,80,000 (RM) + ₹6,75,000 (WIP) + ₹8,10,000 (FG) + ₹13,50,000 (Debtors) = ₹39,15,000 4. Calculation of Current Liabilities: Creditors for Raw Material: Value = Annual Raw Material Cost × (Credit Period / 12) Value = ₹64,80,000 × (1 / 12) = ₹5,40,000 Creditors for Wages (Outstanding Wages): Value = Annual Wages Cost × (Lag in Payment / 12) Value = ₹10,80,000 × (1 / 12) = ₹90,000 Creditors for Overheads (Outstanding Overheads): Value = Annual Overheads Cost × (Lag in Payment / 12) Value = ₹21,60,000 × (1 / 12) = ₹1,80,000 Total Current Liabilities (excluding Cash): ₹5,40,000 (RM) + ₹90,000 (Wages) + ₹1,80,000 (Overheads) = ₹8,10,000 5. Calculate Net Working Capital (before Cash and Safety Margin): Net Working Capital = Total Current Assets (before Cash) - Total Current Liabilities Net Working Capital = ₹39,15,000 - ₹8,10,000 = ₹31,05,000 6. Calculate Cash Balance: Cash = 40% of Total Current Liabilities (including cash, so this is a recursive calculation or needs to be solved simultaneously) Let CL total be the total current liabilities including cash. Let CA total be the total current assets including cash. Cash = 0.40 × CL total CL total = ₹8,10,000 (other liabilities) + Cash Cash = 0.40 × (₹8,10,000 + Cash) Cash = ₹3,24,000 + 0.40 Cash 0.60 Cash = ₹3,24,000 Cash = ₹3,24,000 / 0.60 = ₹5,40,000 So, Total Current Liabilities (CL total ) = ₹8,10,000 + ₹5,40,000 = ₹13,50,000 And Total Current Assets (CA total ) = ₹39,15,000 + ₹5,40,000 = ₹44,55,000 Net Working Capital (after including cash) = ₹44,55,000 - ₹13,50,000 = ₹31,05,000 (Note: The provided solution calculates cash as 40% of ₹8,10,000, which implies cash is 40% of *other* current liabilities, not total current liabilities including cash itself. We will follow the solution's simpler interpretation for consistency.) Cash = 40% of (Creditors for Raw Material + Creditors for Wages + Creditors for Overheads) Cash = 40% of ₹8,10,000 = ₹3,24,000 Revised Total Current Assets: ₹39,15,000 (from RM, WIP, FG, Debtors) + ₹3,24,000 (Cash) = ₹42,39,000 Revised Net Working Capital (before Safety Margin): Net Working Capital = Total Current Assets - Total Current Liabilities Net Working Capital = ₹42,39,000 - ₹8,10,000 = ₹34,29,000 7. Add Safety Margin: Safety Margin = 15% of Net Working Capital Safety Margin = 15% of ₹34,29,000 = ₹5,14,350 8. Total Working Capital Required: Total Working Capital = Net Working Capital + Safety Margin Total Working Capital = ₹34,29,000 + ₹5,14,350 = ₹39,43,350 Summary Table: Particulars Amount (₹) Current Assets Raw Materials Inventory (₹120 × 54,000 × 2/12) 10,80,000 Work in Progress: Raw Material (₹120 × 54,000 × 1/12) 5,40,000 Wages (₹20 × 54,000 × 1/12 × 50%) 45,000 Overheads (₹40 × 54,000 × 1/12 × 50%) 90,000 Total Work in Progress 6,75,000 Finished Goods (₹180 × 54,000 × 1/12) 8,10,000 Debtors (₹200 × 54,000 × 1.5/12) 13,50,000 Cash (40% of Current Liabilities excluding cash) 3,24,000 Total Current Assets (A) 42,39,000 Current Liabilities Creditors of Raw Material (₹120 × 54,000 × 1/12) 5,40,000 Creditors of Wages (₹20 × 54,000 × 1/12) 90,000 Creditors of Overheads (₹40 × 54,000 × 1/12) 1,80,000 Total Current Liabilities (B) 8,10,000 Net Working Capital (A - B) 34,29,000 Add: Safety Margin (15% of Net Working Capital) 5,14,350 Total Working Capital Required 39,43,350