Wint Limited is a mid-sized manufacturing company specializing in industrial equipment parts. It operates on a just-in-time procurement strategy but…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2025
Wint Limited is a mid-sized manufacturing company specializing in industrial equipment parts. It operates on a just-in-time procurement strategy but has recently faced delays in raw material deliveries due to supply chain disruptions in global markets. To maintain production continuity, the management has decided to maintain slightly higher inventories and build in a contingency reserve. The following forecasted financial information is provided for the year ending 31 st March, 2025: Particulars Balance as at 31 st March, 2025 (₹ in lakh) Balance as at 31 st March, 2024 (₹ in lakh) Raw Material 845 585 Work-in-progress 663 455 Finished goods 910 780 Receivables 1,755 1,456 Payables 923 884 Additional details for the year ending 31 st March, 2025: Annual purchases of raw materials (on credit):5,200 lakhAnnual cost of production:5,850 lakhAnnual cost of goods sold (COGS):6,825 lakhAnnual operating cost (includes admin, manufacturing, distribution):4,225 lakhAnnual sales (on credit):7,605 lakh The finance team is currently evaluating the company's working capital requirement due to a planned expansion and potential volatility in receivables collection caused by credit extensions to new clients. Management wants to set aside a 10% contingency reserve in the working capital to deal with unforeseen cash flow constraints (e.g., delayed collections, inventory build-up, or supplier hold-ups). Assume one year = 365 days. You are required to: (i) Calculate the Net Operating Cycle Period (in days). (ii) Determine the Number of Operating Cycles in the year. (iii) Calculate the Working Capital Requirement including a 10% contingency reserve.

Suggested Answer and Working Notes:

(c) Working Notes: 1. Raw Material Storage Period (R) Average Stock of Raw Material = (585 + 845) / 2 = 715 lakh Annual Consumption of Raw Material = Opening Stock + Purchases - Closing Stock = 585 +5,200 - 845 = 4,940 lakh R = (Average Stock of Raw Material / Annual Consumption of Raw Material) × 365 = (715 / 4,940) × 365 = 52.83 or 53 days 2. Work - in - Progress (WIP) Conversion Period (W) Average Stock of WIP = (455 + 663) / 2 = 559 lakh W = (Average Stock of WIP / Annual Cost of Production) × 365 = (559 / 5,850) × 365 = 34.87 or 35 days 3. Finished Stock Storage Period (F) Average Stock of Finished Goods = (780 + 910) / 2 = 845 lakh F = (Average Stock of Finished Goods / Cost of Goods Sold) × 365 = (845 / 6,825) × 365 = 45.19 or 45 days. 4. Receivables (Debtors) Collection Period (D) Average Receivables = (1,456 + 1,755) / 2 = 1,605.5 lakh D = (Average Receivables / Annual Credit Sales) × 365 = (1,605.5 / 7,605) × 365 = 77.06 or 77 days 5. Payables (Creditors) Payment Period (C) Average Payables for Materials = (884 + 923) / 2 = 903.5 lakh C = (Average Payables for Materials / Annual Credit Purchases) × 365 = (903.5 / 5,200) × 365 = 63.42 or 63 days (i) Net Operating Cycle Period = R + W + F + D - C = 53 + 35 + 45 + 77 – 63 = 147 days (ii) Number of Operating Cycles in the Year = 365 / Operating Cycle Period = 365 / 147 = 2.48 times (iii) Amount of Working Capital Required = Annual Operating Cost / Number of Operating Cycles = 4,225 / 2.48 = 1,703.63 lakh Add: 10% Contingency Reserve = 170.363 lakh Total Working Capital Requirement (including contingency) = 1,874 lakh

Topics: Part-A: Financial Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic