XYZ Ltd. wants to establish a shoe manufacturing unit. To setup this unit, it needs a loan. XYZ Ltd, approaches a commercial bank for working…

XYZ Ltd. wants to establish a shoe manufacturing unit. To setup this unit, it needs a loan. XYZ Ltd, approaches a commercial bank for working capital loan. Bank has asked the company to present the proposal for such loan. To prepare such proposal, the company has appointed you and provided some information about the plan. It wants to maintain margin of safety of 10% for contingencies. The company want to keep cash balance of 90,000. The product will be sold at gross profit margin of 25% on COGS. Depreciation will be part of cost of production. Stock of raw material will be held at 1.5 months of its consumption, while finished goods inventory will be maintained at one month's requirement. Finished goods will be valued at manufacturing cost. The company will sell shoes in domestic as well as in foreign market. Total estimated annual sales will be - 30,00,000. 20% of the sales are foreign sales and there will be a delay of 1/2 month to realise the sales proceed from foreign debtors. All domestic sales will be on credit and allowed a credit period of 2 months. Raw material consumed will be 25% of estimated sales and the company will get credit period of 2 months of consumption from its supplier of raw material. Wage expenses will be 20% of sales and will be paid in 1/2 month's lag. Outstanding cash manufacturing overhead expenses at the end of the year will be - 60,000; it will be paid in one month arrear. Estimated total administrative cost (to be paid after one month) will be - 1,80,000. Expected annual sales promotion expenses are - 90,000, which will be paid quarterly in advance. The company want to submit the proposal to bank on cash cost basis.