You have very recently completed a professional course from the national level institute of India. You are being appointed as an Executive Assistant of Managing Director of the newly incorporated company named as Sumati

Answer 6 Computation of Working Capital Requirement Particulars Basis of calculation Amount (₹) Raw material stock (A) 13,00,000 x (6/12) 6,50,000 Raw material stock (B) and packing material 12,52,000 x (3/12) 3,13,000 Stock of finished goods 35,48,000 x (1/12) 2,95,667 Credit to customers (250 x 17,000)/12 42,50,000 x (1/12) 3,54,167 Cash expenses 7,88,000 x (1/12) 65,667 Less: Credit from suppliers 12,52,000 x (1/12) (1,04,333) Working capital requirement 15,74,168 Profit = (250*17,000) - ₹35,48,000 = ₹7,02,000 Requirement of Total capital Amount (₹) Land 2,00,000 Building 16,00,000 Plant & machinery 24,00,000 Working capital 15,74,168 57,74,168 (1) Percentage of yield on investment = Profit/Investment x 100 = (7,02,000/57,74,168) x 100 = 12.16% (2) Percentage of profit on sales = (7,02,000/42,50,000) x 100 = 16.52% (3) Rate of cash expenses per annum before tax Amount (₹) PBT 7,02,000 Add: Depreciation 2,08,000 Cash generation before tax 9,10,000 Rate = (9,10,000/57,74,168) x 100 = 15.76% Working Notes: Calculation of cost of production per annum (Assuming Cash expenses are advance/ or cash reserved for expenses) Amount (₹) Raw material (A) 13,00,000 Raw material (B) 12,52,000 Salary and wages 2,70,000 Repairs and maintenance; 5% on ₹24,00,000, 2% on 16,00,000 (1,20,000 + 32,000) 1,52,000 Depreciation; 7% on ₹24,00,000, 2.5% on 16,00,000 (1,68,000 + 40,000) 2,08,000 Administration and other expenses 1,00,000 Steam 2,24,000 Power 12,000 Packing Drums 30,000 Total 35,48,000 Cash Generation Per annum Administration and other expenses 1,00,000 Steam 2,24,000 Power 12,000 Repair and Maintenance 1,52,000 Salaries and Wages 2,70,000 Packing Drum Expenses 30,000 7,88,000 Assumptions: Solution is based expected production of 250 units for first year of operation In cash expenses, packing drums has been considered. Alternatively, it may be considered as a part of Raw material stock (A) or (B) Credit to consumers has been taken at sales. It may alternatively be taken at cost of production as well. Alternative Answer-I In case, Credit to consumers is considered at cost of production, the calculation would be as under: Computation of Working Capital Requirement Particulars Basic of calculation Amount (₹) Raw material stock (A) 13,00,000 x (6/12) 6,50,000 Raw material stock (B) and packing material 12,52,000 x (3/12) 3,13,000 Stock of finished goods 35,48,000 x (1/12) 2,95,667 Credit to customers 35,48,000 x (1/12) 2,95,667 Cash expenses 7,88,000 x (1/12) 65,667 Less: Credit from suppliers 12,52,000 x (1/12) 1,04,333 Working capital requirement 15,15,668 Requirement of Total capital Amount (₹) Land 2,00,000 Building 16,00,000 Plant & machinery 24,00,000 Working capital 15,15,668 Total Investment 57,15,668 (1) Percentage of yield on investment = Profit/Investment x 100 (7,02,000/57,15,668) x 100 12.28% (2) Percentage of profit on sales = (7,02,000/42,50,000) x 100 16.52% (3) Rate of cash generation per annum before tax Amount (₹) PBT 7,02,000 Add: Depreciation 2,08,000 Cash generation before tax 9,10,000 Rate = (9,10,000/57,15,668) x 100 = 15.92% Working Notes: Profit before tax = Sales -Production Cost Sales = 17000 x 250 = ₹42,50,000 Production cost = ₹35,48,000 Profit = ₹7,02,000 Cost of production per annum Amount (₹) Raw material (A) 13,00,000 Raw material (B) 12,52,000 Salary and wages 2,70,000 Repairs and maintenance; 5% on 24,00,000, 2% on 16,00,000 1,52,000 Depreciation 7% on 24,00,000, 2.5% on 16,00,000 2,08,000 Administration and other expenses 1,00,000 Steam 2,24,000 Power 12,000 Packing drums 30,000 35,48,000 Alternative Answer-II Calculation on the basis of assumption that cash expenses are outstanding Computation of Working Capital Requirement Particulars Basic of calculation Amount (₹) Raw material stock (A) 13,00,000 x (6/12) 6,50,000 Raw material stock (B) and packing material 12,52,000 x (3/12) 3,13,000 Stock of finished goods 35,48,000 x (1/12) 2,95,667 Credit to customers (250 x 17000)/12 42,50,000 x (1/12) 3,54,167 Cash expenses 7,88,000 x (1/12) (65,667) Less: Credit from suppliers 12,52,000 x (1/12) (1,04,333) Working capital requirement 14,42,834 Profit = (250 x 17,000) - ₹35,48,000 = ₹7,02,000 Requirement of Total capital Amount (₹) Land 2,00,000 Building 16,00,000 Plant & machinery 24,00,000 Working capital 14,42,834 56,42,834 (1) Percentage of yield on investment = Profit/Investment x 100 = (7,02,000/56,42,834) x100 12.44% (2) Percentage of profit on sales = (7,02,000/42,50,000)X 100 16.52% (3) Rate of cash generation per annum before tax Amount (₹) PBT 7,02,000 Add: Depreciation 2,08,000 Cash generation before tax 9,10,000 Rate = (9,10,000/56,42,834) x 100 = 16.13%