Estimation of W.Capital : Problem 1:

Following is the cost statement of a company

Raw materials cost Tk. 50 per unit
Direct labor cost 20 per unit
Overheads cost 40 per unit
Total cost 110 per unit
Profit 30 per unit
Selling Price Tk.140 per unit

You are also given the following additional information:
(i) Average Raw material in stock: One month
(ii) Average Raw materials in process: Half a month
(iii) Stock of Finished goods: 30 days
(iv) 20% of sales are cash sales
(v) Expected cash balance is: Tk. 100.000
(vi) Credit allowed to debtors: Two months
(vii) Credit allowed by Creditors: 45 days
(viii) Time Lag in payment of wages: 15 days
(ix) Time lag in Payment of Overhead: 1 month

You are required to prepare statement showing the working capital requirement if level of activity of the company is at 70,000 units.

Solution:
First we should calculate the investment in all current assets: A. Investment in Inventory:

1) Inventory in Raw material: Consumption of Raw material x R.M. Conversion Period
= Tk. 291,667 360 days

70,000 Units x Tk.50
= X 30 days 360 days
(2) Inventory in work in progress:

Cost of Production x W.I P. Conversion Period
= Tk.3,20,833 360 days 70,000 Units x Tk.110 x 15 days

360 days

(3) Finished Goods Inventory:

Cost of Sales
= X Finished goods conversion period 360 days

70,000 Units x Tk.110
= X 30 days 360 days Tk. 6,41,667

Total Investment in Inventory: Tk. 12,54,167

B. Investment in Debtors:

Credit Sales (at cost)
= X Credit Period allowed to debtors 360 days

(70,000 Units x .80) X tk. 110
= X 60 days 360 days Tk. 10,26,667

C. Cash Balance: Tk. 1,00,000