Himalaya Ltd. approached their banker for working capital requirement. The bank has agreed to sanction the same by retaining margins as under: Raw materials: 18% Work-in-progress: 30% Finished goods: 20% Debtors: 10% Fol

Calculation of monthly consumption of raw material, monthly sales and monthly cost of production ₹ Opening stock + purchases (₹1,80,000 + ₹9,35,000) 11,15,000 Less: Closing stock 1,55,000 Annual consumption 9,60,000 Monthly consumption i.e. ₹9,60,000/12 80,000 Monthly sales ₹18,00,000/12 1,50,000 Monthly cost of production ₹14,40,000/12 1,20,000 (a) Calculation of working capital required by Himalaya Ltd. ₹ Raw material - 2 months consumption: (₹80,000 * 2) 1,60,000 Work in progress - 15 days of cost of production (₹1,20,000/2) 60,000 Finished goods - 1 month cost of production 1,20,000 Sundry debtors - 1 month sales 1,50,000 Expenditure for 1 month 50,000 Total working capital 5,40,000 Less: Creditors - 15 days purchases: (₹9,35,000/12 * 0.5) (38,958) Less: Advance received on sales order (2,50,000) Net working capital required by the company 2,51,042 (b) Working capital limits set by bankers ₹ ₹ Raw material - 2 months consumption 1,60,000 Less: 18% margin (28,800) 1,31,200 Work in progress - 15 days cost of production 60,000 Less: 30% margin (18,000) 42,000 Finished goods - 1 month cost of production 1,20,000 Less: 20% margin (24,000) 96,000 Sundry debtors - 1 month sales 1,50,000 Less: 10% margin (15,000) 1,35,000 For expenses Nil Nil Total limit likely to be approved by the bank 4,04,200 Assumptions: The calculations assume a 30-day month for monthly expenditure and a 360-day year for credit period calculations. Cost of production is assumed to be uniform throughout the year. Raw material consumption is derived from opening stock, purchases, and closing stock. All sales are credit sales for the purpose of debtor calculation.