Business Finance

Question

Bristhi Ltd. Company provides the following particulars to determine the required

amount of working capital.

Elements of cost Amount per unit Taka

Raw materials 9.00

Direct labor 4.00

Overhead 7.00

Selling price 25.00

Additional information:

Raw materials in stock on average 1 month, materials are in process on average 1⁄2 month

and finished goods in stock on average 1 month.

Credit allowed by supplies is 1 month, credit allowed to debtors is 2 months, lag in

payment of wages is 1 1⁄2 weeks, lag in payment of overhead is 1 month, 1⁄4 of the output is

sold against cash in hand and at bank is expected to be Tk. 5000, level of a activity

1,50,000 units of production per annum. You may assume that production is carried

throughout the year and wages and overhead accrue similarly.

Answer 1

Annual production = 150,000 units.

Cost per unit:

Raw materials = Tk. 9

Direct labor = Tk. 4

Overhead = Tk. 7

Total cost per unit = Tk. 20

Annual costs:

Raw materials = 150,000 × 9 = Tk. 1,350,000

Wages = 150,000 × 4 = Tk. 600,000

Overhead = 150,000 × 7 = Tk. 1,050,000

Now calculate the working-capital requirements.

1. Raw materials inventory — 1 month:

1,350,000 × 1/12 = Tk. 112,500

1. Work-in-process — 1/2 month:

Assuming materials are 100% introduced and labor and overhead are 50% complete:

Raw materials:

1,350,000 × 1/24 = Tk. 56,250

Labor:

600,000 × 1/24 × 50% = Tk. 12,500

Overhead:

1,050,000 × 1/24 × 50% = Tk. 21,875

Total WIP:

56,250 + 12,500 + 21,875 = Tk. 90,625

1. Finished goods — 1 month:

Annual production cost = 150,000 × 20 = Tk. 3,000,000

Finished goods:

3,000,000 × 1/12 = Tk. 250,000

1. Debtors

One-fourth of sales are cash sales, so three-fourths are credit sales.

Credit production:

150,000 × 3/4 = 112,500 units

Two months' credit:

112,500 × 2/12 = 18,750 units

Using production cost of Tk. 20 per unit:

Debtors = 18,750 × 20

= Tk. 375,000

1. Cash balance:

Tk. 5,000

Therefore, total current assets:

112,500 + 90,625 + 250,000 + 375,000 + 5,000

= Tk. 833,125

Now calculate current liabilities.

1. Creditors for raw materials — 1 month:

1,350,000 × 1/12

= Tk. 112,500

1. Outstanding wages — 1.5 weeks:

600,000 × 1.5/52

= Tk. 17,308 approximately

1. Outstanding overhead — 1 month:

1,050,000 × 1/12

= Tk. 87,500

Total current liabilities:

112,500 + 17,308 + 87,500

= Tk. 217,308

Required working capital:

Working Capital = Current Assets - Current Liabilities

= 833,125 - 217,308

= Tk. 615,817 approximately

Therefore, Bristhi Ltd. requires approximately:

Tk. 615,817 of working capital.

Note: This uses the usual working-capital convention of valuing debtors at cost rather than including the profit element.