The management of Parshvam Limited is planning to expand its business at international level and consults you for preparing and estimation of…

(A) Statement for estimation of Working Capital using Cash Cost Basis Parshvam Limited Particulars Amount (₹) Amount (₹) (A) Current Assets 1. Raw materials 15,90,000 x 1/12 1,32,500 2. WIP RM 15,90,000 x 0.5 /12 x 90% 59,625 ~ Wages 6,00,000 x 0.5 /12 x 50% 12,500 ~ Manufacturing OH 23,40,000 x 0.5 /12 x 50% 48,750 ~ Other OH 74,472 x 0.5 /12 x 50% 1,552 3. FG (on COGS) 46,04,472 x 1/12 3,83,706 4. Debtors ~ Domestic 27,61,314 x 1.5/12 3,45,164 ~ Export 26,27,158 X 1/12 WN - 5 2,18,930 5. Cash/bank balance (given) 1,50,000 6. Prepaid admin exp 3,60,000 x 2/12 60,000 7. Income tax paid in advance (given) 25,000 Gross working capital 14,37,727 (B) Current Liabilities 1. Creditors ~ Domestic 9,00,000 x 2/12 1,50,000 ~ Import 6,00,000 x 3/12 1,50,000 2. Lag in wages payment 6,00,000 x 1/12 50,000 3. Lag in manufacturing OH 23,40,000 x 0.5/12 97,500 Lag in other OH 74,472 x 0.5/12 3,103 4. Lag in S&D exp 3,00,000 x 1/12 25,000 Excess of CA over CL 9,62,124 Add: 15% safety margin (9,87,124 x 15%) 1,44,319 Net working capital 11,06,443 Notes – (a) Working Capital is estimated on Cash Cost Basis (b) Other Overheads are assumed to be the part of production. (c) In absence of information on % completion for wages, manufacturing and other overheads, it is assumed to be 50% complete for the purpose of calculating WIP. (d) Other Overheads are also assumed to be outstanding for a period of 1/2 month. In absence of specific information, it can also be assumed that nothing is outstanding or prepaid. (B) If just the monetary aspects and factors are considered then, Parshvam limited should discontinue its operations at international level as the Cash Cost of sales for export at 26,27,158 is higher than the Export sales value which is just - 24,80,000. In reality, non-monetary factors are also considered in decision making; exports will add a new customer base for the company. Furthermore, existence at international level brings on a high credibility and image to the company, etc. WN 1 - Calculation of gross profit on Export Sales: Let the domestic selling price be - 100. Therefore, Gross profit = 20, and cost per unit = 80 Now as given, Export price is 10% less than the domestic price = 100 - 10% = 90. However, the cost per unit to produce exported goods will remain at 80 only. So gross profit on exports will be - 90 - 80 = 10. Therefore, Gross profit in % for Export Sales = 10 / 90 = 11.11% Domestic Export Total Sales 30,00,000 24,80,000 54,80,000 Less: Gross Profit (6,00,000) (2,75,528) (8,75,528) 20% for Domestic 11.11% for Export COGS 24,00,000 22,04,472 46,04,472 Add: Admin Exp 1,97,080 1,62,920 3,60,000 (To be Apportioned in the ratio of Sales) Add: S&D Expense 1,64,234 1,35,766 3,00,000 (To be Apportioned in the ratio of Sales) Add: Bank Fees and charges for providing LOC services - 1,24,000 1,24,000 Cash Cost of Sales 27,61,314 26,27,158 53,88,472 WN 2 - Preparation of Cost/Income Statement Particulars Amount (₹) Raw Materials Domestic 9,00,000 Import WN - 3 6,90,000 Wages 6,00,000 Manufacturing Overheads (Cash) WN - 4 23,40,000 Other Overheads (Bal. Fig) 74,472 Cost of Production/Cost of Goods Sold 46,04,472 Add: Admin Exp 3,60,000 Add: S&D Exp 3,00,000 Add: Bank charges & Fees for L.O.C services 1,24,000 Cost of Sales 53,88,472 WN 3 – Calculation of Raw Materials Purchased - Imports Purchase Price = 6,00,000 + Custom Duty @ 20% = 1,20,000 (-) Upfront Duty Drawback @ 5% = ₹ (30,000) Total Value of Raw materials = 6,90,000 WN 4 – Calculation of Cash Manufacturing Overheads Manufacturing Overheads = 26,40,000 Less: Depreciation on Machinery (24,00,000 x 10%) = ₹ (2,40,000) Less: Revenue Subsidy from EPC Board *** (24,00,000 x 2.5%) = ₹ (60,000) Cash Manufacturing Overheads = 23,40,000 ***Revenue subsidy shall not be capitalized but instead it will result in bringing down your manufacturing expenses which is revenue in nature. Had the it been the capital subsidy, then it would have reduced the purchase price of the machine and thereby changing the amount of depreciation. WN 5 - Credit Period for Export customers Since the company is availing benefit of Letter of Credit (L.O.C), the funds blocked in export customers would only be for 1 month and not 3 months; as the company would receive the entire Export Sales value in 1 month's time from the financial institution after paying the bank charges and fees.