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Financial Management-Suggestion

Capital Budgeting:
1. Bajaj Ltd. is considering two mutually exclusive projects X and Y. The
following details are made available to you.
Rs. lakhs
Particulars
Project X
Project Y
Project Cost
700

700
------

------Cash Inflows: Year 1


400
Year 2
500
Year 3
100
Year 4
200
Year 5
100

200
100
400
350
600
---------

-------Total
1,300

1,650
--------

--------Assume no residual values at the end of the fifth year. The firms cost of capital is
10%. Required in respect of each of the two projects: (i) NPV, using 10% discounting
(ii) IRR Method .
PV of Re 1
Year

10%

25%

26%

27%

28%

36%

37%

38%

40%

0.909 0.800 0.794 0.787 0.781 0.735

0.826 0.640 0.630 0.620 0.610 0.541 0.533 0.525 0.510

0.730 0.725 0.714

0.751 0.512 0.500 o.488 0.477 0.398 0.389 0.381 0.364

0.683 0.410 0.397 0.384 0.373 0.292 0.284 0.276

0.260

0.621 0.328 0.315 0.303 0.291 0.215 0.207 0.200

0.186

[ICWA Inter June 1995]

Year

Statement showing NPV of Project X & Y


Cash Inflows
PV @ 10% p.a
X
Y

Present Value
X
Y

200

400

.909

181.80

363.60

100

500

.826

82.60

413.00

400

100

.751

300.40

75.10

350

200

.683

239.05

136.60

600

100

.621

372.60

62.10

--------- --------1,176.45 1050.40

Total PV
Less: Initial
investment
NPV

700.00
---------476.45

700.00
--------350.40

NPV at lower rate


IRR = Lower Rate + ---------------------------------- * Difference in rate
Difference in NPV between
Lower and higher rate
= 10 +

350.40
-------------------- * 30
350.40 +52.40

10 + 26.10 = 36.10%.

2. A company is considering to purchase one of the following two machines, the


details of which are given below.
Profit before Depreciation and Tax
Year
1
2
3
4.
5

Machine A
(Rs)
150,000
1,48,000
89,000
1,09,000
56,000

Machine B
(Rs)
1,20,000
1,36,000
1,25,000
78,000
95,000

Cost of Machine

Rs 1,86,000

1,50,000

Rs 14,000

12,000

Additional working Capital


Life of the Machine

5 Years

Scrap value of machine


At the end of life

Rs 6,000

Tax rate

5 Years
Rs 4,000

40%

40%

Calculate the average rate of return of machines and give your comment.

Ans:
Statement showing Profit after Depreciation and Tax of Mach. A
Year

Profit before
Dep. and tax

Depreciation

Profit before
tax

Tax @ 40%

Profit after
Tax

1,50,000

36,000

1,14,000

45,600

68,400

1,48,000

36,000

1,12,000

44,800

67,200

89,000

36,000

53,000

21,200

31,800

1,09,000

36,000

73,000

29,200

43,800

56,000

36,000

20,000

8,000

12,000
------------2,23,200
------------

Average Annual Profit after Depreciation & Tax * 100


ARR =

----------------------------------------------------------------Total Average Investment of the Project

Rs 44,640*100
-------------------------------------------------------------------Rs 1,10,000

40.58%

Total Profit after Depreciation & Tax


Where, Average Earning =

-------------------------------------------------------Estimated Number of Years of Project


2,23,200
= -------------------------------------------------------5 years
=

Rs 44,640

Average Investment = (Initial Investment Scrap value) /2 + Additional Working Capital


+ Scrap Value
= ( Rs 1,86,000 6,000) /2 + Rs 14,000 + Rs 6,000
= Rs 1,10,000

Statement showing Profit after Depreciation and Tax of Mach.B


Year

Profit before
Dep. and tax

Depreciation

Profit before
tax

Tax @ 40%

Profit after
Tax

1,20,000

29,200

90,800

36,320

54,480

1,36,000

29,200

1,06,800

42,720

64,080

1,25,000

29,200

95,800

38,320

57,480

78,000

29,200

48,800

19,520

29,280

95,000

29,200

65,800

26,320

39,480
------------2,44,800
------------

Average Annual Profit after Depreciation & Tax * 100


ARR =

----------------------------------------------------------------Total Average Investment of the Project

Rs 48,960*100
-------------------------------------------------------------------Rs 89,000

55.01%

Total Profit after Depreciation & Tax


Where, Average Earning =

-------------------------------------------------------Estimated Number of Years of Project


2,44,800
= --------------------------------------------------------

5 years
=

Rs 48,960

Average Investment = (Initial Investment Scrap value) /2 + Additional Working Capital


+ Scrap Value
= ( Rs 1,50,000 4,000) /2 + Rs 12,000 + Rs 4,000
= Rs 89,000
Comment: As ARR of Machine B is greater than Machine A, Machine B should be
preferred.

3. A Company has to make a choice between two projects namely A and B. The
initial capital outlay of two projects is Rs 1,35,000 and Rs 2,40,000 respectively for A
and B. There will be no scrap value at the end of the life of both the projects. The
opportunity cost of capital of the company is 16%. The annual incomes are as under:
Year
16%

Project A

Project B

--

60,000

0.862

30,000

84,000

0.743

1,32,000

96,000

0.641

84,000

1,02,000

0.552

84,000

90,000

0.476

You are required to calculate for each project:


(i) Discounted Pay-back period
(ii) Profitability Index
(iii) NPV

Discounting factor @

Ans:
Statement showing Cumulative Present Value
Year
1

Annual Income
A
B
--60,000

Discount
Rate @ 16%
.862

30,000

84,000

.743

22,290

62,412

22,290

1,14,132

1,32,000

96,000

.641

84,612

61,536

1,06,902

1,75668

84,000

1,02,000

.552

46,368

56,304

1,53,270

2,31,972

84,000

90,000

.476

39,984

42,840

1,93,254

2,74,812

(i) Discounted Pay-back period


Pay-back period of project A
= 3 years + ( 28,098/46,368) = 3.61 years.
Pay-back period of project B
= 4 years + ( 8,028/42,840) = 4.19 years.
(ii) Profitability Index
PV of net cash inflows
PI = ------------------------------Initial cash outlays
Rs 1,93,254
Project A = ----------------- = 1.43
Rs 1,35,000
Rs 2,74,812
Project B = ----------------- = 1.15

A
---

PV
B
51,720

Cumulative PV
A
B
-51,720

Rs 2,40,000
(iii) Net Present Value:
NPV = PV of net cash inflows Initial investment
Project A = Rs 1,93,254 Rs 1,35,000 = Rs 58,254
Project B = Rs 2,74,812 Rs 2,40,000 = Rs 34,812.
4. A Company is considering to purchase a machine. Two machines A and B are
available, each costing Rs 5 lakhs. In comparing the profitability of the machines, a
discounting rate of 10% is to be used and machine is to be written off in five years by
Straight line method of depreciation with nil residual value.
Cash inflows after tax are expected as follows:
Rs ( lakhs)
Year
1

Machine A
1.5

Machine B
0.5

2.0

1.5

2.5

2.0

1.5

3.0

1.0

2.0

Indicate which machine would be profitable using the following methods of ranking
investment proposals: (i) Pay-back Method (ii) NPV Method (iii) PI Method (iv)
Average Rate of Return Method. The discounting factors at 10% are
Year

0.909

.826

.751

.683

5
Discounting
Factor
.621
[ CS Final June 1998]

Ans:
(i) Pay-back period:
Statement showing Cumulative Cash Inflows
Year
1

Cash Inflows
Mach. A Mach. B
1.50
0.50

Cumulative cash inflows


A
B
1.50
0.50

2.00

1.50

3.50

2.00

2.50

2.00

6.00

4.00

1.50

3.00

7.50

7.00

1.00

2.00

8.50

9.00

Pay-back period
Machine A = 2 year + (1.50/2.50) = 2.6 years
Machine B = 3 year + (1.00/3.00) = 3.33 years.
(ii) NPV Method:
Year

Statement showing NPV


Cash Inflows
Machine A Machine B

PV @ 10% p.a

Present Value
Machine A Machine B

1.50

0.50

.909

1.36

0.45

2.00

1.50

.826

1.65

1.24

2.50

2.00

.751

1.88

1.50

1.50

3.00

.683

1.02

2.05

1.00

2.00

.621

0.62

1.24

.507

---------6.53

6
Total PV
Less: Initial
investment
NPV

5.00
---------1.53

6,084
--------6.48
5.00
--------1.48

(iii) Profitability Index


PI =

PV of net cash inflows


------------------------------Initial cash outlays

Rs. 6.53
Machine A = ----------------- = 1.306
Rs. 5.00
Rs 6.48
Machine B = ----------------- = 1.296
Rs. 5.00
(iv) ARR Method:
Statement Showing Earning After Tax and Depreciation
Machine A
Total Cash inflows
Less: Total depreciation
--------Earning after tax and depreciation
Life of Machine
years
Average annual earnings
Average annual earnings
ARR = ---------------------------------- * 100
Initial investment
0.70 *100
Machine A = ---------------- = 14%
5
o.80 * 100
Machine B = -------------- = 16%
5

Machine B

8.50
5.00
---------

9.00
5.00

3.50
----------

4.00
--------

5 years

0.70

0.80

Rankings:
Method

(i) Pay-back Method


period

Machine
---------------------A
B
I

II

Remarks

Shorter Pay-back
of Machine A.

(ii) NPV Method

II

Machine A gives
higher NPV.

(iii) PI Method

II

Machine A has higher


PI.

(iv) ARR Method

II

Machine B has higher


return percentage.

5. Precision Instruments is considering two mutually exclusive projects X and Y.


The following details are made available to you.
Rs. lakhs
Particulars
Project X
Project Y
Project Cost
700

700
------

------Cash Inflows: Year 1


500
Year 2
400
Year 3
200

100
200
300

Year 4

450

Year 5

600

100
100
---------------Total
1,300

1,650
--------

--------Assume no residual values at the end of the fifth year. The firms cost of capital is
10%. Required in respect of each of the two projects: (i) NPV, using 10% discounting
(ii) IRR Method (iii) PI Method.
PV of Re 1
Year
1

10%

25%

26%

27%

28%

36%

0.909 0.800 0.794 0.787 0.781 0.735

37%

38%

40%

0.730 0.725 0.714

0.826 0.640 0.630 0.620 0.610 0.541 0.533 0.525 0.510

3
4

0.751 0.512 0.500 o.488 0.477 0.398 0.389 0.381 0.364


0.683 0.410 0.397 0.384 0.373 0.292 0.284 0.276 0.260

0.621 0.328 0.315 0.303 0.291 0.215 0.207 0.200 0.186


[ICWA Inter June 1995]

Ans:
Year

Statement showing NPV of Project X & Y


Cash Inflows
PV @ 10% p.a
X
Y

Present Value
X
Y

100

500

.909

90.90

200

400

.826

165.20

330.40

300

200

.751

225.30

150.20

450

100

.683

307.35

68.30

600

100

.621

372.60

62.10

---------

---------

454.50

Total PV
Less: Initial
investment
NPV
IRR of Project X
Statement showing NPV at 10% and 28%
Cash Inflows
Discounting rate
10%
28%

Year

1161.35

1065.50

700
---------461.35

700
--------365.50

Present Value
10%
28%

100

.909

.781

90.90

78.10

200

.826

.610

165.20

122.00

300

.751

225.30

143.10

450

.683

.373

307.35

167.85

600

.621

.291

372.60

174.60

.477

--------- --------1161.35 685.65

Total PV
Less: Initial
investment
NPV

700.00
---------461.35

700.00
--------(-) 14.35

NPV at lower rate


IRR = Lower Rate +------------------------------------ * Difference in rate
Difference in NPV between
Lower and higher rate
= 10 +

461.35
-------------------- * 18
461.35 + 14.35

10 + 17.46 = 27.46%.

Year
1

IRR of Project Y
Statement showing NPV at 27% and 38%
Cash Inflows
Discounting rate
27%
38%

Present Value
27%
38%

100

78.70

.787

.725

362.50

200

.620

300

.488

450

.384

600

.303

Total PV
Less: Initial
investment
NPV

.525

124.00

210.00

146.40

76.20

.276

172.80

27.60

.200

181.80

20.70

--------703.70

--------697.00

700
---------3.70

700
--------(-) 3.00

.381

IRR = Lower Rate + NPV at lower rate


---------------------------------- * Difference in rate
Difference in NPV between
Lower and higher rate
= 27 +

3.70
-------------------- * 11
3.70 + 3.00

27 + 6.07 = 33.07%.

PI Method at 10% Discounting Rate


PI = Total PV of Cash Inflows
-------------------------------------Initial Investment
Project X = 1161.35
---------------- = 1.659
700
Project Y = 1065.50
---------------- = 1.522
700
**************************************************************

Cost Of Capital
Problem 1: A Company has issued 10% Debenture of Rs 5,00,000. Corporate tax rate is
40%. Calculate the cost of debt if issued (i) at par (ii) at a premium of 10% (iii) at a
discount of 5%, assume the debt is irredeemable.
Ans: (i) Issued at par
Kd = [R(1-T)]
= 10(1-.40)
= 6%
(ii) Issued at a premium of 10%
Kd = [I / IP (1-T)]
= [50,000 /5,50,000 (1-.40)]
= 5.45%
(ii) Issued at 10% discount
Kd = [I/IP (1-T)]
= [50,000/4,75,000 (1-.40)]
= 6.32%
Problem 2: A Company issued 8% Debenture redeemable at the end of 6 years at at Rs
95. The face value of Debenture is Rs 100. Corporate tax rate is 50%. Find out cost of
debt.
Ans:
[ I + (RP IP)/N ] (1-T)
Kd = -----------------------------------[ RP + IP] / 2
[ 8 + (100-95) / 6] (1-.50)
=

------------------------------------

(100+95)/2
= 4.53%

Problem 3: A Company has issued 12% Debenture of Rs 100 each redeemable at the end
of 10 years. Tax rate is 40%. Floatation cost is 2%. Find out the cost of debt if issued (i)
at par (ii) at a premium of 10% (iii) at a discount of 5%.
Ans:
(i) If Debenture are issued at par
[ I + (RP IP)/N ] (1-T)
Kd = ---------------------------------------[ RP + IP] / 2

[12 + (100-98) /10] (1-.40)


Kd = ----------------------------------------------[ 100 + 98] / 2
= 7.32 /99 = 7.39%
(ii) If Debenture is issued at 10% premium:
[ I + (RP IP)/N ] (1-T)
Kd = ----------------------------------------[ RP + IP] / 2
[12 + (100 107.80) /10] (1-.40)
=

-------------------------------------------------[ 100 + 107.80] / 2

= 6.732/ 103.90

= 6.48%
Note: IP = (2,20,000 -4,400) = 2,15,600

(iii) If debentures are issued at 10% discount

[ I + (RP IP)/N ] (1-T)


Kd = ---------------------------------------[ RP + IP] / 2
[12 + (100 93.10) /10] (1-.40)
Kd = ---------------------------------------------[ 100 + 93.10] / 2
= 7.614 / 96.55
= 7.89%
Problem 4:.Calculate the average cost of capital before tax and after tax from the
following information. Assume that tax rate is 55%.
Types of capital

Proportion in capital Before tax cost of capital (%)


Structure (%)

Equity capital

25

24.44

Preference capital

10

27.29

Debentures

50

7.99

Retained earnings

15

18.33

Ans:
Statement showing average cost of capital (before tax)
Types of capital
Proportion
Before tax cost of capital Average cost of
in new
capital
capital
structure
1. Equity share
25%
24.44
611.00
capital (Ke)
2. Preference share
capital( Kp)

10%

27.29

272.90

3. Debenture (Kd)

50%

7.99

399.50

4. Retained
earnings (Kr)

15%

18.33

275.00
------------1558.40

WACC
Average cost of capital after tax
WACC (before tax) * (1-tax rate)
= 1558.40 (1-.55) = 7.02%
Problem 5:. A Companys capital structure is given below:
Sources of finance
(%)
Equity share capital

Amount

Proportion(%)

10,00,000

Cost after tax

50%

12

Retained earnings

3,00,000

10

11

Preference share capital

2,00,000

20

10

Long term loan

4,00,000

20

12

Calculate Weighted average cost of capital of the company.

Ans:
Statement showing Weighted Average Cost of Capital
Sources
Amount
Cost after tax
(%)
1. Equity share capital (Ke)
10,00,000
12

Cost after tax (Rs)


1,20,000

2. Retained earnings (Kr)

3,00,000

11

33,000

3. Preference share capital (Kp)

2,00,000

10

20,000

4. Long term debt (Kd)

4,00,000

12

48,000
------------2,23,000

WACC = Rs 2,23,000 / Rs 19,00,000 *100 = 11.74%

LEVERAGE
1. The data relating to two companies are given below:
Company A

Company B

Equity capital

Rs 6,00,000

Rs 3,50,000

12% Debentures

Rs 4,00,000

Rs 6,50,000

Output (units) p.a.

60,000

15,000

Selling price / unit

Rs 30

Rs 250

Fixed cost p.a.


Variable cost p.a.

Rs 7,00,000
Rs 10

14,00,000
Rs 75

You are required to calculate the operating leverage, financial leverage and
combined leverage of two companies.

[ C.A. PE-II Nov. 2002]


Ans:

Statement showing Profit before Tax


Company A
Company B
Rs
Rs
Sales
18,00,000
37,50,000
Less: Variable Cost
6,00,000
11,25,000
------------------------------------Contribution
12,00,000
26,25,000
Less: Fixed cost
7,00,000
14,00,000
----------------------------Profit before Interest & Tax [PBIT] 5,00,000
12,25,000
Less: Interest
48,000
78,000
---------------------------------Profit before tax [PBT]
4,52,000
11,47,000
----------------------------------(i) Operating Leverage (OL) = Contribution / PBIT
Company A

= 12,00,000 /5,00,000 = 2.4

Company B

= 26,25,000 / 12,25,000 = 2.14

(ii) Financial Leverage (FL) = PBIT / PBT


Company A

= 5,00,000 / 4,52,000 = 1.11

Company B

= 12,25,000 / 11,47,000 = 1.07

(iii) Combined Leverage = Operating Leverage * Financial Leverage (OL *


FL)
Company A = 2.4 * 1.11 = 2.66

Company B = 2.14 * 1.07 = 2.29


2. Prepare the income statement of a firm which gives the following details
relating to its operations:
Operating Leverage

Financial Leverage

Annual interest paid

Rs 10 lakhs

Contribution / Sales

0.40

Tax rate

40%
[ICWA Inter, Dec, 2002]

Ans:
PBIT
F.L = (PBIT) / (PBIT interest)
2 = PBIT / (PBIT Rs 10,00,000)
Or PBIT = Rs 20,00,000
Contribution
OL = Contribution / PBIT
4 = Contribution / 20,00,000
Or Contribution = Rs 80,00,000
Sales
Contribution / Sales = 0.40
80,00,000 / Sales = 0.40
Sales = Rs 200,00,000

Fixed Cost
Total Contribution Fixed Cost = PBIT
Or 80,00,000 Fixed Cost = Rs 20,00,000
Or Fixed Cost = Rs 60,00,000
Income Statement of the Firm
Sales
Less: Variable Cost (60% of sales)

Rs
200,00,000
120,00,000

-------------Contribution
Less: Fixed Cost

80,00,000
60,00,000

---------------PBIT
20,00,000
Less: Interest
PBT
Less: Tax @ 40%
--------------Profit after Tax (PAT)

10,00,000
--------------10,00,000
4,00,000
6,00,000
--------------

3. The following details of A Ltd for the year ended 31.3.06 are furnished.
Operating Leverage
3:1
Financial Leverage
2:1
Interest charges per annum
Rs 20 lakh
Corporate tax rate
50%
Variable cost as percentage of sales
60%
Prepare the Income Statement of the company.
[ ICWA Inter, Dec 1995]
Ans:
PBIT
F.L = (PBIT) / (PBIT interest)

2 = PBIT / (PBIT Rs 20,00,000)


Or PBIT = Rs 40,00,000
Contribution
OL = Contribution / PBIT
3 = Contribution / 40,00,000
Contribution = 120,00,000 (Rs)
Fixed Cost
Total Contribution Fixed cost = PBIT
12,00,000 Fixed Cost = 40,00,000
Fixed Cost = Rs 80,00,000
Sales & Variable Cost
Variable Cost = 60% of Sales
P.V. Ratio = 100% - 60% = 40% of Sales
P.V. Ratio = Contribution / Sales
.40 = 120,00,000 / Sales
Or Sales = Rs 300,00,000
Variable Cost = Rs 300,00,000 * 60%
= Rs 180,00,000

Income Statement of the Firm


Sales
Less: Variable Cost (60% of sales)
-----------Contribution
Less: Fixed Cost
------------PBIT
40
Less: Interest

300
180
120
80

( 40 * 50%)

-----------PBT
Less: Tax @ 50%
-----------Profit after Tax (PAT)

20

20
10

10
------------4. The following financial data have been furnished by A Ltd and B Ltd. For
the year ended 31.3.05.
A Ltd
B Ltd
Operating Leverage
3:1
4:1
Financial Leverage
2:1
3:1
Interest charges p.a.
Rs 12 lakhs
Rs 10 lakhs
Corporate tax rate
40%
40%
Variable cost
60%
50%
Prepare Income Statements of the companies. Also comment on the financial
position and structure of the two companies.
Ans:
A Ltd:
Financial Leverage = PBIT / PBIT-Interest
2

= PBIT /PBIT 12 lakhs

Or PBIT = Rs 24 lakhs
Operating Leverage = Contribution / PBIT
3

= Contribution / 24 lakhs

Contribution = Rs 72 lakhs
Now, Total contribution Fixed Cost = EBIT
72 lakhs Fixed cost = Rs 24 lakhs
Fixed cost = Rs 48 lakhs
Variable cost as % of sales = 60%
PVR = 100% - 60% = 40%
PVR = Contribution / Sales
.40 = 72 / Sales
Sales = Rs 180 lakhs
B Ltd
Financial Leverage = PBIT / PBIT-Interest
3

= PBIT /PBIT 10 lakhs

Or PBIT = Rs 15 lakhs
Operating Leverage = Contribution / PBIT
4

= Contribution / 15 lakhs

Contribution = Rs 60 lakhs
Now, Total contribution Fixed Cost = EBIT

Rs 60 lakhs Fixed cost = Rs 15 lakhs


Fixed cost

= Rs 45 lakhs

Variable cost as % of sales = 50%


PVR = 100% - 50% = 50%
PVR = Contribution / Sales
.50 = 60 / Sales
Sales = Rs 120 lakhs
Income Statement
A Ltd
Ltd
Sales
Less: Variable Cost
( % of sales)
Contribution
Less: Fixed Cost
PBIT
Less: Interest
PBT
Less: Tax @ 40%
PAT

180
108
--------------72
48
---------------24
12
-----------12.00
4.80
-----------7.20

Rs in lakhs
B
120
60
-----------------60
45
--------------15
10
-----------5.00
2.00
----------3.00

Comments: The following are the noticeable points of the


two companies.
(a) PV ratio of B Ltd is more than A Ltd.

(b) OL of B Ltd is higher than A Ltd i.e. it indicates fixed cost


as a percentage of sales of B Ltd are greater than A Ltd.
Fixed cost as a percentage of sales
A Ltd = (48 * 100) /180 = 26.67%
B Ltd = (45 * 100) / 120 = 37.50%
(c) FL of B Ltd is 3 against 2 for A Ltd. This indicates more
proportion of debt in the capital structure of B Ltd. If we
calculate % of interest on sales the following result is
obtained.
A Ltd = (12 * 100) /180 = 6.67%
B Ltd = (10 * 100) / 120 = 8.33%
(d) Though PV ratio of B Ltd is higher than A Ltd but both FL
and OL of B Ltd is higher than A Ltd. As a consequence
percentage of PAT on the basis of sales gives a different
picture.
A Ltd = (7.2 *100) /180 = 4%
B Ltd = (3 * 100) / 120 = 2.5%
*************************************************************
************
WORKING CAPITAL MANAGEMENT
1. From the following information presented by a manufacturing company,
prepare a working capital forecast statement for the coming year.
Expected monthly sales- 32,000 units at Rs 10 per unit. The anticipated rates of
cost to selling prices are: Raw materials 40%, Labour 30%, Budgeted Overhead Rs
64,000 per month.
Stock will include raw materials for Rs 96,000 and 16,000 units of finished goods.
Material will stay in process for 2 weeks.
Credit allowed to Debtors is 5 weeks.
Credit allowed by Creditors is one month.
Lag in payment of overhead is 2 weeks.

Wages will be paid on the last day of the week of the work.
Cash in hand is expected to be Rs 20,000.
Assume that production is carried on evenly throughout the year and overhead
accrue similarly and a time period of 4 weeks is equivalent to a month.
[ Kalyani University (H) 1997]
Ans:
Particulars

Statement showing Cost and Profit per week


Per Week (Rs)

Raw material (32000 *10 * 40%/4 )


Labour
(32,000 *10 * 30%/4 )
Overheads ( 64,000 / 4)

32,000
24,000
16,000
---------------72,000
8,000

Total Cost
Profit

---------------80,000

Sales

Statement Showing Working Capital Requirement Forecast


Details
Period
Raw
WIP
Finished
(
In material
Goods
Weeks)
(A) Raw Materials
- In Store
3
96,000
- In WIP
2
64,000
- In Finished Goods
2
64,000
- To Debtors
5
12
Less: Credit from Creditors
4
8
(B) Labour
- In WIP
- In Finished Goods
- To Debtors
Less: Lag in payment
(C) Overheads
- In WIP
- In Finished Goods

1
2
5
---------8
1
7
1
2

Debtors

Creditors

1,60,000
1,28,000

24,000
48,000
1,20,000
24,000

16,000
32,000
80,000

- To Debtors

5
32,000
8
2

Less: Lag in payment

6
(D) Profit:
- To Debtors

40,000
5
96,000

1,04,000

Net Working Capital


Add: Cash in hand

1,44,000

4,00,000

= Rs 5,60,000
= Rs 20,000
-----------------5,80,000
-----------------

Working Note:
Raw Material Storage Period = Estimated stock of Raw Material
-----------------------------------------Weekly requirement of Raw Material
=

Rs 96,000
-------------------------------------------Rs 32,000
= 3 weeks

Finished goods storage Period = Estimated stock of finished goods


-----------------------------------------Weekly production of finished goods
=

16,000
-------------------------------------------8,000
= 2 weeks

2. From the following details concerning a manufacturing enterprise estimate the


amount of working capital needed to finance an activity level of 50%. The capacity of the
concern is to produce 2,40,000 units p.a.
Expected selling price Rs 10 per unit.

1,84,000

Cost of Raw materialsRs 3 per unit


Direct labour cost
Rs 2.50
Overhead ( including depreciation Rs 50,000) Rs 2,50,000.
Raw materials are in stock on an average for one month. Materials are in process
on an average for two months. Finished goods are in stock on an average for two months.
Credit allowed to debtors three months and that received from suppliers of raw materials
one month. Lag in payment of wages half a month and overhead one month. Cash in hand
and at bank- 10% of net working capital.
You may assume that production is carried on evenly throughout the year and
overheads accrue similarly. One forth of the outputs is sold against cash.
[ C.U. (H) 1992]
Ans:
Particulars

Statement showing Cost and Profit per Month


Per Month (Rs)

Raw material (1,20,000 *3 / 12)


Labour
(1,20,000 *2.50 / 12)
Variable Overheads (2,00,000 / 12)
Fixed Overhead ( 50,000 / 12)
Total Cost

30,000
25,000
16,667
4,167
75,834
24,166
1,00,000

Profit
Sales ( 1,20,000 * 10 /12)

Statement Showing Working Capital Requirement Forecast


Details
Period Raw
WIP
Finished
(
In material
Goods
Month
s)
(A) Raw Materials
- In Store
1
30,000
- In WIP
2
60,000
- In Finished Goods
2
60,000
To
Debtors
3
( 30,000*3*3/4)
8
1
Less: Credit from Creditors
7
(B) Labour
- In WIP
- In Finished Goods
- To Debtors
( 25,000 * 3 * )

1
2
3
6

Debtors

Creditors

67,500
30,000

25,000
50,000
56,250

Less: Lag in payment


(C) Variable Overheads
- In WIP
- In Finished Goods
- To Debtors
( 16,667 * 3 * )
Less: Lag in payment

(D) Profit:
- To Debtors
( 24,166*3*3/4)

12,500

1/2
5
1/2

16,667
33,334

1
2
3

37,501
16,667

6
1
5
-------54,374
3
30,000

Working Capital
Add: Cash in hand

1,01,667

( Rs 4,31,459 * 10/90)

1,43,334

2,15,625

= Rs 4,31,459
= Rs 47,940
-----------------4,79,399
-----------------

3. From the following information presented by a manufacturing company,


prepare a working capital requirement forecast statement for the coming year.
Expected monthly sales of 32,000 units at Rs 10 per unit.
The anticipated ratios of cost to selling price are: Raw material- 40%, Labour30%, Budgeted overhead Rs 16,000 per week.
Overhead expenses include depreciation of Rs 4,000 per week. Planned stock will
include raw materials for Rs 96,000 and 16,000 units of finished goods.
Material will stay in process for 2 weeks. Credit allowed to debtors is 5 weeks.
Credit allowed by creditors is 1 month. Lag in payment of overhead is 2 weeks.
25% of sales may be assumed against cash and cash in hand is expected to be Rs
25,000.

59,167

Assume that production is carried on evenly throughout the year and wages and
overhead accrue similarly. A time period of 4 weeks is equivalent to a month.
[ CU (H) 1987]

Ans:
Particulars

Statement showing Cost and Profit per Week


Per Week (Rs)

Raw material (32,000 *10*40% / 4)


Labour
(32,000 *10*30% /4)
Variable Overheads (16,000-4,000)
Fixed Overhead
Total Cost

32,000
24,000
12,000
4,000
72,000
8,000
80,000

Profit
Sales ( 32,000 * 10 /4)

Statement Showing Working Capital Requirement Forecast


Details
Period
Raw
WIP
Finished
(
In material
Goods
Weeks)
(A) Raw Materials
- In Store
3
96,000
- In WIP
2
64,000
- In Finished Goods
2
64,000
To
Debtors
5
( 32,000*5*3/4)
12
4
Less: Credit from Creditors
8
(B) Labour
- In WIP
- In Finished Goods
- To Debtors
( 24,000 * 5 * )

1
2
5
8

(C) Variable Overheads


- In WIP
- In Finished Goods
- To Debtors

1
2
5

Debtors

Creditors

1,20,000
1,28,000

24,000
48,000
90,000

12,000
24,000
45,000

24,000

( 12,000 * 5 * )
Less: Lag in payment

8
2
6
--------

(D) Profit:
- To Debtors
( 8,000*5*3/4)

30,000

5
96,000

Working Capital
Add: Cash in hand

1,00,000

1,36,000

= Rs 4,65,000
= Rs 25,000
-----------------4,90,000
-----------------

( Rs 4,31,459 * 10/90)

Working Note:
Raw Material Storage Period = Estimated stock of Raw Material
-----------------------------------------Weekly requirement of Raw Material
=

Rs 96,000
-------------------------------------------Rs 32,000
= 3 weeks

Finished goods storage Period = Estimated stock of finished goods


-----------------------------------------Weekly production of finished goods
=

16,000
-------------------------------------------8,000
= 2 weeks

2,85,000

1,52,000