WORKING CAPITAL - 2
CHAPTER
10 WORKING CAPITAL - 2
Concept #1 Management of Receivables
Concept #2 Factoring Proposals
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FINANCIAL MANAGEMENT
By GOURAV KABRA
Concept #3 Management of Inventory (EOQ)
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WORKING CAPITAL - 2
Concept #4 Management of Cash
Concept #5 Management of Payables
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FINANCIAL MANAGEMENT
By GOURAV KABRA
(i) 200 Units; (ii) 70 Units; (iii)
Question #1 PTP D24 Ans:
220 Units, 20 Units
Himalaya Refrigeration Company purchases 1,600 units of a component annually,
from Bolts & Pins Associates. The annual cost of holding each unit of component is ₹ 8
and the cost of placing order each time is ₹ 100.
You are required to calculate:
(i) Economic Order Quantity;
(ii) Reorder Level; and
(iii) Maximum and Minimum Inventory Level, if the company operates 320 days
in a year, material procurement time is 10 days, and safety stock is 20 units.
Assume minimum consumption rate per day = average consumption rate
per day.
Question #2 PTP J24 Ans: ₹ 2,00,000
The annual cash requirement of MJ Ltd. is ₹ 10 lakh. The company has marketable
securities in lot sizes of ₹ 50,000, ₹ 1,00,000, ₹ 2,00,000, ₹ 2,50,000 and ₹ 5,00,000. Cost
of conversion of marketable securities per lot is ₹ 1,000. The company can earn 5%
annual yield on its securities. As a Cost and Management Accountant you are
required to prepare a table indicating which lot size will have to be sold by the
company. Also show that the Economic lot size can be obtained by the Baumol
Model.
Question #3 PTP D23 Ans: 1,600 Kgs.
P Ltd. has received an offer of quantity discounts on its order of materials as under:
Ordering quantities (Kgs) Price per kg (₹)
Less than 500 12.00
500 but less than 1600 11.80
1,600 but less than 4000 11.60
4,000 but less than 8,000 11.40
8,000 and above 11.20
The annual requirement for the material is 8,000 kgs. The ordering cost per order is ₹
12.00 and the stock holding cost is estimated at 20% of material cost per annum. As a
Cost and Management Accountant you have to compute the most economical
ordering quantity.
₹ 13,74,415; ₹ 21,23,245;
Question #4 PTP J23 Ans:
₹ 14,99,220
TULSI Ltd. provides the following information:
The company maintains a minimum cash balance of ₹ 10,00,000. The standard
deviation of the company’s daily cash flow is ₹ 3,60,000. The annual interest rate is
12%. The transaction cost of buying & selling securities is ₹ 180 per transaction.
(Assume 360 days in a year).
Required: Calculate the upper limit, return point, and Average Cash Balance as per
the Miller-Orr model.
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WORKING CAPITAL - 2
₹ 1,74,96; ₹ 3,55,280;
Question #5 PTP J23 Ans:
₹ 2,89,680
A garment trader is preparing a cash forecast for the first three months of the calendar
year 2023. His estimated sales for the forecasted periods are as below:
Particulars January February March
(₹ in 000) (₹ in 000) (₹ in 000)
Total Sales 600 600 800
(i) The trader sells directly to the public against cash payments and to other
entities on credit. Credit sales are expected to be four times the value of
direct sales to the public. He expects 15% of customers to pay in the month
in which credit sales are made, 25% to pay in the next month and 58% to
pay in the next-to-next month. The outstanding balance is expected to be
written off.
(ii) Purchases of goods are made in the month prior to sales and it amounts to
90% of sales and are made on credit. Payments of these occur in the month
after the purchase. No inventories of goods are held.
(iii) Cash balance as of 1st January 2023 is ₹ 50,000.
(iv) Actual sales for the last two months of the calendar year 2022 are as below:
Particulars November December
(₹ in 000) (₹ in 000)
Total sales 640 880
You are required to prepare a monthly cash budget for the three months from January
to March, 2023.
Question #6 PTP D22 Ans: ₹ 0.73084 Cr.
Tulsian Ltd, is considering changing its credit terms from 1/35, net 60 to 2/10, net 60. As
a result, the credit sales will increase from ₹ 150 crores to 105%, the Average collection
period will decline by 25 days and the Default Percentage will increase from 0.5% to
1%. Collection Expenses will increase from ₹ 35,000 to ₹ 40,500. At present, Selling Price
is ₹ 300 per unit, Contribution to Sales Ratio 20%, Average Cost is ₹ 270 per unit and
60% of the credit customers avail cash discount. Should the credit terms be changed
if the required rate of return is 24% (pre-tax) and the Tax rate is 25%? (Take 360 days in
a year.)
Question #7 PTP D19 Ans: ₹ 1,59,810; ₹ 1,98,800
BENTECH (I) LTD. is presently having credit sales of ₹ 12 lakh. The existing credit terms
are 1/10, net 45 days and average collection period is 30 days. The current bad debts
loss is 1.5%. In order to accelerate the collection process further as also to increase
sales, the company is contemplating liberalization of its existing credit terms to 2/10,
net 45 days. It is expected that sales are likely to increase by 1/3 of existing sales, bad
debts increase to 2% of sales and average collection period to decline to 20 days.
The contribution to sales ratio of the company is 22% and opportunity cost of
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FINANCIAL MANAGEMENT
By GOURAV KABRA
investment in receivables is 15 per cent (pre-tax). 50 per cent and 80 per cent of
customers in terms of sales revenue are expected to avail cash discount under existing
and liberalization scheme respectively. The tax rate is 30%.
(Assume 360 days in a year).
Required: Should the company change its credit terms?
Question #8 PTP D18; MQP J23 Ans: Policy III - ₹ 2.82L
GOLDEN GARMENT LTD. manufactures readymade garments and sells them on credit
basis through a network of dealers. Its present sale is ₹ 60 lakh per annum with 20 days
credit period. The company is contemplating an increase in the credit period with a
view to increasing sales. Present variable costs are 70 per cent of sales and the total
fixed costs ₹ 8 lakh per annum.
The company expects pre - tax return on investment @25per cent. Some other details
are given as under:
Proposed credit policy Average collection Expected annual sales
period (days) (Amount in Rs. Lakh)
I 30 65
II 40 70
III 50 74
Required:
Which credit policy should the company adopt?
Present your answer in a tabular form. Assume 360-day a year. Calculations should be
made up to two digits after decimal. Ignore taxation.
Question #9 PTP D17 Ans: (-₹ 41,900)
Jai & Karti are regular customers of MJK Ltd. Kolkata and have approached the sellers
for extension of credit facility for enabling them to purchase goods from MJK Ltd. On
the analysis of past performance and on the basis of information supplied, the
following pattern of payment schedule emerges in regard to Jai & Karti:
Schedule Pattern
At the end of 30 days 15% of the bill
60 days 34% of the bill
90 days 30% of the bill
100 days 20% of the bill
Non-recovery 1% of the bill
Jai & Karti wants to enter into a firm commitment for purchase of goods of ₹ 15,00,000
in 2016, deliveries to be made in equal quantities on the first day of each quarter in
the calendar year. The price per unit of the commodity is ₹ 150 on which a profit of ₹
5 per unit is expected to be made. It is anticipated by the MJK Ltd. that taking up of
this contract would mean an extra recurring expenditure to ₹ 5,000 per annum. If the
opportunity cost of funds in the hands of MJK Ltd. is 24% per annum, would you as a
Management Accountant of the seller recommend the grant of credit to Jai & Karti?
Working should form part of your answer.
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WORKING CAPITAL - 2
Question #10 MQP D24/J23 Ans: (i) ₹ 10,000 (ii) NIL
A firm is considering pushing up its sales by extending credit facilities to the following
categories of customers:
(i) Customers with a 10% risk of non-payment, and
(ii) Customers with a 30% risk of non-payment.
The incremental sales expected in case of category (i) are ₹ 40,000 while in case of
category (ii) they are ₹ 50,000. The cost of production and selling costs are 60% of sales
while the collection costs amount to 5% of sales in case of category (i) and 10% of
sales in case of category (ii).
Examine and analyze whether the firm has to extend credit facilities to each of the
above categories of customers.
₹ 11,31,250; ₹ 11,50,000;
Question #11 MQP D24 Ans:
₹ 10,82,812
ABC Corporation is considering relaxing its present credit policy and is in the process
of evaluating two proposed policies. Currently, the firm has annual credit sales of ₹ 50
lakhs and accounts receivable turnover ratio of 4 times a year. The current level of loss
due to bad debts is ₹1,50,000. The firm is required to give a return of 25% on the
investment in new accounts receivables. The company’s variable costs are 70% of the
selling price. Analyse the following given information and examine which is the better
option.
(Amount in ₹)
Present Policy Policy
Policy Option I option II
Annual credit sales 50,00,000 60,00,000 67,50,000
Accounts receivable turnover ratio 4 times 3 times 2.4 times
Bad debt losses 1,50,000 3,00,000 4,50,000
Question #12 MQP J24 Ans: A: 800 Units; B: 4 orders
The annual demand for an item is 3,200 units. The unit cost is ₹ 6 and inventory carrying
charges is 25% p.a. If the cost of one procurement is ₹ 150, determine: (A) E.O.Q (B)
No. of orders per year (C) Time between two consecutive orders.
₹ 15.7L, ₹ 18.26L, ₹ 19.334L,
Question #13 MQP D23 Ans:
₹ 21L
Surya Industries Ltd. is marketing all its products through a network of dealers. All sales
are on credit and the dealers are given one-month time to settle bills. The company
is thinking of changing the credit period with a view to increase its overall profits. The
marketing department has prepared the following estimates for different periods of
credit:
Particulars Present Policy Plan I Plan II Plan III
Credit period (in months) 1 1.5 2 3
Sales (₹ Lakhs) 120 130 150 180
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FINANCIAL MANAGEMENT
By GOURAV KABRA
Fixed costs (₹ Lakhs) 30 30 35 40
Bad debts (% of sales) 0.5 0.8 1 2
The company has a contribution/sales ratio of 40% further it requires a pre-tax return
on investment at 20%. Examine each of the above proposals and recommend the
best credit period for the company.
Question #14 MQP D23 Ans: EOQ – 3,000 Units; ₹ 150
X Ltd. buys its annual requirement of 36,000 units in six instalments. Each unit cost ₹ 1
and the ordering cost is ₹ 25. The inventory carrying cost is estimated at 20% of unit
value. Find the total annual cost of the existing inventory policy. Examine how much
money can be saved by using E.O.Q?
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