PQ Ltd. has commenced new business segment in 2023-24. The following information has been ascertained for annual production of 25,000 units which is…

CA Intermediate · Financial Management and Strategic Management · RTP · May 2024
PQ Ltd. has commenced new business segment in 2023-24. The following information has been ascertained for annual production of 25,000 units which is the full capacity. Cost per unit (₹) Material 100 Labour and variable overhead expenses 50 Fixed manufacturing expenses 35 Depreciation 15 Selling expenses (80% variable) 10 In the first two years of operations, production and sales are expected to be as follows: Year Production (No. of units) Sales (No. of units) 1 12,000 10,000 2 18,000 19,000 The selling price is expected to be - 250 . To assess the working capital requirements, the following additional information is available: (a) Stock of materials 2 months' average consumption (b) Debtors 1.5 month's average sales. (c) Cash balance - 50,000 (d) Creditors for supply of materials 1 month's average purchase during the year. (e) Expenses All expenses will be paid 1 month in advance during the year. Goods equal to 15% of the year's production (in terms of physical units) will be in process on the average requiring full materials but only 40% of the other expenses. The management is also of the opinion to make 10% margin for contingencies on computed figure and value the closing stock at cost of production. PREPARE, for the two years: (i) A projected statement of Profit/Loss (Ignoring taxation); and (ii) A projected statement of working capital requirements on a cash cost basis.

Suggested Answer and Working Notes:

(i) PQ Limited Projected Statement of Profit / Loss (Ignoring Taxation) Year 1 Year 2 Production (Units) 12,000 18,000 Sales (Units) 10,000 19,000 (₹) (₹) Sales revenue (A) (Sales unit × ₹ 250) 25,00,000 47,50,000 Cost of production: Materials cost (Units produced × ₹ 100) 12,00,000 18,00,000 Direct labour and variable expenses (Units produced × ₹ 50) 6,00,000 9,00,000 Fixed manufacturing expenses (Production Capacity: 25,000 units X 35) 8,75,000 8,75,000 Depreciation (Production Capacity: 25,000 units X 15) 3,75,000 3,75,000 Gross Factory Cost 30,50,000 39,50,000 Add: Opening W.I.P. 2,91,000 Less: Closing W.I.P. 2,91,000 3,99,000 Cost of goods produced 27,59,000 38,42,000 Add: Opening stock of finished goods (Year 1: Nil; Year 2 : 2,000 units) 4,59,833 Cost of Goods available for sale (Year 1: 12,000 units; Year 2: 20,000 units) 27,59,000 43,01,833 Less: Closing stock of finished goods at average cost (year 1: 2000 units, year 2 : 1000 units) (Cost of Production × Closing stock/ units produced) 4,59,833 2,13,444 Cost of Goods Sold 22,99,167 40,88,389 Add: Selling expenses – Variable (Sales unit × ₹ 8) 80,000 1,52,000 Add: Selling expenses -Fixed (25,000 units × ₹ 2) 50,000 50,000 Cost of Sales : (B) 24,29,167 42,90,389 Profit (+) / Loss (-): (A - B) 70,833 4,59,611 Working Notes: Calculation of Stock of Work-in-progress Particulars Year 1 (₹) Year 2 (₹) Raw Material (material cost × 15%) 1,80,000 2,70,000 Labour & Mfg. Expenses (Labour & mfg. expenses × 15% × 40%) 88,500 1,06,500 Depreciation (Depreciation x 15% × 40%) 22,500 22,500 Total 2,91,000 3,99,000 1. Calculation of creditors for supply of materials: Year 1 (₹) Year 2 (₹) Materials consumed during the year 12,00,000 18,00,000 Add: Closing stock (2 month’s average consumption) 2,00,000 3,00,000 14,00,000 21,00,000 Less: Opening Stock - 2,00,000 Purchases during the year 14,00,000 19,00,000 Average purchases per month (Creditors) 1,16,667 1,58,333 2. Prepayment for expenses: Year 1 (₹) Year 2 (₹) Direct labour and variable expenses 6,00,000 9,00,000 Fixed manufacturing expenses 8,75,000 8,75,000 Selling expenses (variable + fixed) 1,30,000 2,02,000 Total 16,05,000 19,77,000 Average per month 1,33,750 1,64,750 (ii) Projected Statement of Working Capital Requirement (Cash Cost Basis) Year 1 (₹) Year 2 (₹) (A) Current Assets Inventories: - Stock of Raw Material (12,000 units - 100 2/12); (18,000 units - 100 2/12) 2,00,000 3,00,000 - Finished Goods (Refer working note 3) 4,01,083 1,92,611 - Work In Process (Refer working note 5) 2,68,500 3,76,500 Receivables (Debtors) (Refer working note 4) 2,66,927 4,84,684 Prepayment for Expenses (Refer working note 2) 1,33,750 1,64,750 Minimum Cash balance 50,000 50,000 Total Current Assets/ Gross working capital (A) 13,20,260 15,68,545 (B) Current Liabilities Creditors for raw material (Refer working note 1) 1,16,667 1,58,333 Total Current Liabilities 1,16,667 1,58,333 Net Working Capital (A - B) 12,03,594 14,10,212 Add: 10% contingency margin 1,20,359 1,41,021 Total Working capital required 13,23,953 15,51,233 Working Note: 3. Cash Cost of Production: Year 1 (₹) Year 2 (₹) Gross Factory Cost as per projected Statement of P&L 30,50,000 39,50,000 Add: Opening W.I.P - 2,68,500 Less: Closing W.I.P 2,68,500 3,76,500 Cost of goods produced 27,81,500 38,42,000 Less: Depreciation (3,75,000) (3,75,000) Cash Cost of Production 24,06,500 34,67,000 Add: Opening Stock at Average Cost: - 4,01,083 Cash Cost of Goods Available for sale 24,06,500 38,68,083 Less: Closing Stock at Avg. Cost 4,01,083 1,92,611 Cash Cost of Goods Sold 20,05,417 36,75,472 4. Receivables (Debtors) Year 1 (₹) Year 2 (₹) Cash Cost of Goods Sold 20,05,417 36,75,472 Add: Selling expenses – Variable (Sales unit × ₹ 8) 80,000 1,52,000 Add: Selling expenses -Fixed (25,000 units × ₹ 2) 50,000 50,000 Cash Cost of Debtors 21,35,417 38,77,472 Average Debtors 2,66,927 4,84,684 Calculation of Stock of Work-in-progress (Cash Cost Basis) Particulars (₹) Raw Material (material cost × 15%) 1,80,000 2,70,000 Labour & Mfg. Expenses (Labour & mfg. expenses × 15% × 40%) 88,500 1,06,500 Total 2,68,500 3,76,500

Topics: Part-A: Financial Management

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