1. As a Finance Manager describe the various factors that you would take into consideration before assessing the working capital requirements.
2. The Average Monthly Usage of a particular item in Reliable Industries Limited in the current year is expected to be 3000 units. The fixed cost per order is Rs. 1500/-. The purchase price is Rs. 2400 per box, containing a dozen units in each box. It, however, is not necessary to order for the full box of 12 units. The inventory carrying cost is 25% of the inventory value per annum. The quantity discount allowed per unit is 2%.
What will be the Optimum Order Quantity in each of the following three cases, on an Annual Usage Basis:
When the minimum order size required for quantity discount is:
(a) 1000 units
(b) 3000 units
(c) 10,000 units
Give reasons for your specific answers in each of three cases separately, duly supported by facts and figures.
3. “Trade credit is regarded as a spontaneous source of short term finance”, discuss and comment.
4. The management of Royal Industries has called for a statement showing the working capital to finance a level of activity of 1,80,000 units of output for the year. The cost structure for the company’s product for the above mentioned activity level is detailed below:
Cost per unit
| Raw Material | Rs 20 |
| Direct Labor | 5 |
| Overheads (including depreciation of Rs 5 per unit) | 15 |
| —- | |
| Profit | 40 |
| Selling Price | 10 |
| 50 |
Additional information:
(a) Minimum desired cash balance is Rs. 20,000.
(b) Raw materials are held in stock, on an average, for two months.
(c) Work-in-progress (assume 50% completion stage) will approximate to half- a-month’s production.
(d) Finished goods remain in warehouse, on an average, for a month.
(e) Suppliers of materials extend a month’s credit and debtors are provided two month’s credit; cash sales are 25% of total sales.
(f) There is a time-lag in payment of wages of a month; and half-a-month in the case of overheads.
From the above facts, you are required to prepare a statement showing working capital requirements.
5. Discuss the critical decisions that you need to take in working capital management. Emphasize the important ways in which those decisions differ from those concerned with the management of the fixed capital of a business.
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