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Operating Cycle and Working Capital Analysis

RK Limited plans to sell 100,000 units next year. They estimate raw material costs of Rs. 400,000 per month, manufacturing costs of Rs. 160,000 per month, and selling/admin/financing costs of Rs. 120,000 per month. The total monthly costs are Rs. 680,000. The selling price per unit is Rs. 100. The company estimates a monthly sales level of 8,000 units. Based on input periods, the total investment in current assets is estimated to be Rs. 3,960 lakhs. Key criteria for evaluating working capital management include liquidity, inventory turnover, credit terms with customers and suppliers, and various working capital ratios.

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Sangeetha K S
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80 views8 pages

Operating Cycle and Working Capital Analysis

RK Limited plans to sell 100,000 units next year. They estimate raw material costs of Rs. 400,000 per month, manufacturing costs of Rs. 160,000 per month, and selling/admin/financing costs of Rs. 120,000 per month. The total monthly costs are Rs. 680,000. The selling price per unit is Rs. 100. The company estimates a monthly sales level of 8,000 units. Based on input periods, the total investment in current assets is estimated to be Rs. 3,960 lakhs. Key criteria for evaluating working capital management include liquidity, inventory turnover, credit terms with customers and suppliers, and various working capital ratios.

Uploaded by

Sangeetha K S
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Application of operating cycle

Operating cycle estimation helps in exercising


controller working capital
RK Limited plans to sell 1 lakh units next year the
expected cost of goods sold are as follows:

Unit cost Monthly cost

Raw material cost Rupees 50 rupees


400000
Manufacturing expand Rupees 20 Rs. 160000
Selling administration financing   Rs.15 Rs. 120000
expenses
Total Rs.85 Rs. 680000
Selling price per unit is expected to
be rupees hundred

*A monthly sales level of 8000


 Raw material stage =3 months 
 Working -in-process stage =1 months 
 Finished goods stage = 1months 
 Debtors stage = 2 months 
Investment in Various Current Assets 

Input  Period  (months) Raw WIP Finished goods  Debtors Total in (‘000)
material 
Raw material

in stock 3 1200
 
in work in progress 1 400

In Finished Goods  1 400

in debtors 2 800 2800

Manufacturing Expenses 

in work in progress ½* 80

In Finished Goods  1 160

in debtors 2 320 560

Selling Administration and


financial Expenses
In Finished Goods  1 120

in debtors 2 240 360

Profit in Debtors  2 240


240
  1200 480 680 1600 3960
 @ Manufacturing expenses are expected to occur evenly the work in progress
stage lasts for 1 month hence on average the manufacturing expense
component in working progress value will be equal to half month
manufacturer.
 Total investment in current asset works out to be Rs.3960 lacs this sum is the
side cash balance may be added to get an estimation of Working Capital
need.
Criteria for evaluation of Working Capital Management

 Liquidity
  Availability of cash : Industries
  Inventory turnover
  credit extend to customer
   credit obtained from supplier
  Under trading and over trading
Ratio Analysis on WC
   Current ratio: CA/CL
  Quick ratio: (CA-Inventory) /CL
  Cash to current assets: Measures of liquidity position of the company
compared to the other two ratios
   Sales to cash: indicates the turnover of cash to the turnover the business
(sales)
  Average collection period: receivables management, it is the net credit
period extended by the  company to the customer
  Inventory turnover ratio: larger the better
  Working capital to sales ratio: are your the turnover better for the company

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