Prepare an estimation of working capital needs from the subsequent information of a trading relates with:
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(a)
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Projected Annual Sales
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1,00,000
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(b)
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Selling Price
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Rs.8 per unit
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(c)
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Profit Margin on Sales
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25%
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(d)
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Average Credit Period Allowed to Customers
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8 weeks
|
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(e)
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Average Credit Period Allowed by Suppliers
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4 weeks
|
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(f)
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Average Stock Holding in terms of Sales Requirement
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12 weeks
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(g)
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Allow 10% for Contingencies
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Solution:
Statement demonstrating working Capital Requirements
|
(a)
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Current Assets
Stock (12 Weeks)
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Rs.
1,38,462
|
|
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(Rs.6,00,000 × 12/52)
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92,308
|
|
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Debtors (8 weeks)
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2,30,770
|
|
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Rs. 6,00,000 × 8/52)
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|
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Less:
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Current Liabilities
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46,154
|
|
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Creditors (4 weeks)
|
|
|
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(6,00,000 × 4/52)
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|
|
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Net Working Capital (A-B)
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1,84,616
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Add:
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10% for Contingencies
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18,462
|
|
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Total Working Capital Required
|
|
Working Notes
(i) Cost of Goods Sold
Sales = Rs. 1,00,000 . 8 = Rs. 8,00,000
Profits = Rs. 8,00,000 . 25% = Rs. 2,00,000
Cost of Sales = Rs. 8,00,000-2,00,000= Rs. 6,00,000
(ii) As, it is a trading concern; hence cost of sales is treated as purchases.
(iii) Profits have been ignored since profits may or may not be utilized as source of working capital.