Working capital numerical useful for CCP

Working capital numerical useful for CCP

Question 1 A newly formed company has applied to the Commercial Bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year: Per unit Elements of cost: (Rs.) Raw material 40 Direct labour 15 Overhead 30 Total cost 85 Profit 15 Sales 100 Other information: Raw material in stock : average 4 weeks consumption, Work – in progress (completion stage, 50 per cent), on an average half a month. Finished goods in stock : on an average, one month. Credit allowed by suppliers is one month. Credit allowed to debtors is two months. Average time lag in payment of wages is 1½ weeks and 4 weeks in overhead expenses. Cash in hand and at bank is desired to be maintained at Rs. 50,000. All Sales are on credit basis only. Required: (i) Prepare statement showing estimate of working capital needed to finance an activity level of 96,000 units of production. Assume that production is carried on evenly throughout the year, and wages and overhead accrue similarly. For the calculation purpose 4 weeks may be taken as equivalent to a month and 52 weeks in a year.(ii) From the above information calculate the maximum permissible bank finance by all the three methods for working capital as per Tondon Committee norms; assume the core current assets constitute 25% of the current assets. (PCC-Nov. 2007)(8 marks) Answer Calculation of Working Capital Requirement (A) Current Assets Rs. (i) Stock of material for 4 weeks (96,000  40  4/52) 2,95,385 (ii) Work in progress for ½ month or 2 weeks Material (96,000  40  2/52) .50 73,846 Labour (96,000  15  2/52) .50 27,692 Overhead (96,000  30  2/52) .50 55,385 1,56,923 (iii) Finished stock (96,000  85  4/52) 6,27,692 (iv) Debtors for 2 months (96,000  85  8/52) 12,55,385 Cash in hand or at bank 50,000 Investment in Current Assets 23,85,385 (B) Current Liabilities (i) Creditors for one month (96,000  40  4/52) 2,95,385 (ii) Average lag in payment of expenses Overheads (96,000  30  4/52) 2,21,538 Labour (96,000  15  3/104) 41,538 2,63,076 Current Liabilities 5,58,461 Net working capital (A – B) 18,26,924 Minimum Permissible Bank Finance as per Tandon Committee Method I : .75 (Current Assets – Current Liabilities) .75 (23,85,385 – 5,58,461) .75 (18,26,924) – 5,58,461 = Rs. 13,70,193 Method II : .75  Current Assets – Current Liabilities .75  23,85,385 – 5,58,461 17,89,039 – 5,58,461 = Rs. 12,30,578 Method III: .75 (Current Assets – CCA) – Current Liabilities
.75 (23,85,385 – 5,96,346) – 5,58,461
.75 (17,89,039) – 5,58,461

13,41,779 – 5,58,461 = Rs. 7,83,318