ABC Ltd., a newly formed company has applied to the Private Bank for the first time for financing it's Working Capital Requirements. The following…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2025
ABC Ltd., a newly formed company has applied to the Private Bank for the first time for financing it's Working Capital Requirements. The following information is available about the projections for the current year: Estimated Level of Activity Completed Units of Production 31,200. Raw Material Cost 40 per unit Direct Wages Cost 25 per Unit Overhead 40 per Unit (Incl 10of Depreciation) Selling Price 150 per unit GP Ratio (Cash Cost) 30% Net Profit Ratio 25% (On Total cost) Raw Material in Stock Avg of 30 days consumption Work in Progress Stock at 30% of FG Produced Units **Valued at Prime Cost Material - 90% into process Finished Goods Stock 2,500 units Credit Allowed by the supplier 30 Days Credit Allowed to Purchasers 45 Days Direct Wages [Lag in payment] 15 Days Expected Cash Balance 1,25,000 Safety margin is to be kept at 15% of the net working capital required inclusive of the margin amount. Assume that production is carried on evenly throughout the year (360 days) and wages and overheads accrue similarly. All sales are on the credit basis. You are required to CALCULATE the Net Working Capital Requirement.

Suggested Answer and Working Notes:

Problem mentions that the company has applied to the Private Bank for financing its working capital needs. Ideally, banks would not finance for Depreciation cost being a non-cash cost and it would also not finance the profit for you. So, problem needs to be solved using Cash Cost Basis. Estimation of working capital required (cash cost basis) Particulars Amount A) Current Assets A1) Stock of RM 1,32,080.00 A2) Stock of WIP 4,77,360.00 A3) Stock of FG 2,37,500.00 A4) Debtors 4,09,335.75 A5) Cash & Cash Equivalents 1,25,000.00 Gross Working Capital 13,81,275.75 Less: B) Current Liabilities B1) Creditors 1,43,086.67 B2) Lag in Wages Payment 38,350.00 Excess of Current Assets Over Current Liabilites (A) - (B) 11,99,839.08 Add: Safety Margin @ 15% Of Net Working Capital 2,11,736.31 Net Working Capital 14,11,575.39 WN -1: Calculation of Profit Profit = 25% of total cost i.e 20% of sales price = {(31,200-2,500) x 150} x 20% = 8,61,000 WN - 2: Completed Units WIP Units Raw Mat. Consumed 31,200 9,360 Direct Wages 12,48,000 3,36,960 Overheads 7,80,000 1,40,400 9,36,000 1,68,480 Gross Factory Cost 29,64,000 6,45,840 36,09,840 Add: Op WIP - Less: Cl. WIP (At Prime Cost) 4,77,360 Cost of Production 31,32,480 Add: Op FG Stock - Less: Cl. FG Stock 2,37,500 Cash Cost of Goods Sold 28,94,980 Add: Selling & Distribution Expenses (Bal. Figure) 3,79,706 Cost Of Sales 32,74,686 Profit* 8,61,000 Sales 41,35,686 *It is assumed that profit is unchanged WN 3 - Calculation of WIP stock (units) and WIP stock amount WIP UNITS = 30% of FG produced units i.e 30% of 31,200 units = 9,360 units WIP amount (at prime cost) Raw materials = 9,360 x 40 x 90% = 3,36,960 Direct wages = 9,360 x 25 x 60% = 1,40,400 WN 4 - Calculation of purchases from suppliers Raw Materials Consumed = OP RM Stock + Purchases - Closing RM Stock 15,84,960 = 0 + Purchases – 1,32,080 Purchases = 17,17,040 WN 5 - Calculation of safety margin Safety Margin = 15% Of Net Working Capital Needs Excess Of CA Less CL 85 11,99,839.08 Safety Margin 15 2,11,736.31 Net Working Capital 100 1411575.388

Topics: Part-A: Financial Management

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