Sundaram Industries Ltd., a medium-sized manufacturing company based in Tamil Nadu, is engaged in producing a consumer product that involves…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2026
Sundaram Industries Ltd., a medium-sized manufacturing company based in Tamil Nadu, is engaged in producing a consumer product that involves significant working capital requirements. The company's finished goods are sold across state borders, and therefore all sales and purchases are subject to Integrated GST (IGST) at 18%. The company spends a total of 90 lakhs annually in cash, incurred at a constant rate. Its selling price structure consists of the following elements: Raw Material – 60%Wages - 20%Direct Overheads – 10%Gross Profit – 10% Thus, 90% of the selling price represents the cost of production. During the current month, the company has processed 75% of its purchases into finished goods and sold them entirely. Wages and Overheads are paid 80% in the current month and 20% in the next month. The Cash-to-Cash Conversion Cycle (CCC) is 30 days shorter than the Gross Operating Cycle. The company's Cash Turnover is 9 times per year. At the end of the current month, the company has paid - 45,000 towards IGST liability. The company holds long-term investments which generate a monthly return of 1.5% net of 10% TDS. If needed, the company can borrow / invest funds at an interest rate equal to this pre-tax return. There is no WIP. The company's supplier has offered a 2% cash discount if invoices are settled within 15 days, compared to the regular day credit period. Management must evaluate whether to accept this discount. (i) PREPARE a Working Capital Statement as at the end of the month, clearly showing Current Assets and Current Liabilities, and compute the net Working Capital requirement. (ii) Suppose company has offered credit terms from its major supplier of 2/15, net 60. CALCULATE the implied annual cost of foregoing the discount and advise whether the company should accept the offer given its current cost of capital. (iii) Assuming invoice value is 10,000, COMPARE the net cost to the company if it accepts the discount versus if it refuses the discount and invests the funds between day 15 and day 60.

Suggested Answer and Working Notes:

(i) Let the Purchase of Raw Material be X. Hence, RM consumed = 0.75X. Wages 1/3rd of RM = 0.25X OH & GP 1/3rd of RM each = 1/3rd of RM = 0.25X Sales = 0.75X + 0.25X + 0.25X = 1.25X GST paid = Output IGST - Input IGST 45,000 = 0.225X - 0.18X = 0.045X Purchases (X) = 10,00,000 Sales = 1.25X = 12,50,000 Cash Turnover = 9 = 360/Cash cycle Cash cycle = 360/9 = 40 days Operating Cycle = 40 + 30 = 70 days Closing Stock = 25% of Purchases = 2,50,000 RM Holding period = 2,50,000 / (7,50,000 / 30 days) = 10 days Cash Cycle = Gross Operating Cycle – Credit Period by Supplier 40 days = 70 days - Credit Period by Supplier Credit Period by Supplier = 30 days or 1 months Gross Operating Cycle = Inventory Conversion + Debtors Credit period Debtors Credit period = 70 - 10 = 60 days Statement of Working Capital requirements (₹) (₹) A. Current Assets Inventory: -Raw materials (Refer WN) 2,50,000 Receivables (Debtors) (12,50,000 x 2 months) 25,00,000 Cash balance (90,00,000 / 9) 10,00,000 37,50,000 Gross Working Capital 37,50,000 B. Current Liabilities: Payables: -Creditors for materials (1 month) 10,00,000 Wages and overhead outstanding (20% of Total wages & OH i.e 20% x 2,50,000 for 1 month) 50,000 10,50,000 Net working capital (A - B) 27,00,000 (ii) Evaluating Supplier's Offer Gross Return for Additional borrowing/ investment = (1.5% / 90%) x 12 = 20% If the company does not avail the cash discount and pays the amount after 45 days, the implied cost of interest per annum would be approximately: Cost of foregoing cash discount = [100 / (100 - d)]^(365/t) - 1 = [100 / (100 - 2)]^(365/45) - 1 = [100 / 98]^(365/45) - 1 = (1.0204)^8.11 - 1 = 1.1754 - 1 = 0.1754 or 17.54% Advise: Company should not accept supplier's offer since the gross return is more than the supplier's offer. (iii) Comparison of Net Cost, if the invoice amount is 10,000 Particulars Refuse discount (₹) Accept discount (₹) Payment to supplier 10,000 9,800 Return from investing - 9,800 between day 15 and day 60: 45/360 x 9,800 x 20% (245) Net Cost 9,755 9,800 Advise: Thus, it is better for the company to refuse the discount, as return on cash retained is more than the saving on account of discount.

Topics: Part-A: Financial Management

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