- (a) What is operating cycle?
(b) Based on the information given below, you are required to compute the Working Capital requirement
| of AXIL INDIA CO. Ltd. | 4+12 | |
| Rs./unit | ||
| Raw materials | 5 | |
| Other Variable Costs | 4 | |
| Overheads | 2 | |
| Profit | 1 | |
| Selling Price | 12 |
Additional information:
- Level of activity 20,800 units per annum.
- Raw Materials are in stock for an average of 6 weeks.
- Finished Goods are in stock for an average of 6 weeks.
- W. I. P. is for 4 weeks.
- Credit allowed by suppliers of raw materials is for 4 weeks.
- Credit allowed to Debtors is for 8 weeks.
- Lag in payment of Overheads is 2 weeks.
- Cash in hand and at Bank Rs. 15,000.
(a) The operating cycle refers to the time it takes for a company to convert its inventory into cash through the sale of goods or services. It encompasses the various stages involved in the production and sales process, including the purchase of raw materials, conversion of raw materials into finished goods, and the collection of cash from customers. The operating cycle is also known as the cash conversion cycle.
(b) To compute the working capital requirement for AXIL INDIA CO. Ltd., we need to consider the various components of the operating cycle and their respective time periods:
- Raw materials: Average stock of raw materials = (Raw materials cost per unit) × (Weeks of stock) = Rs. 5 × 6 weeks = Rs. 30 per unit
- Work-in-progress (WIP): WIP requirement = (Variable costs per unit + Overheads per unit) × (Weeks of WIP) = (Rs. 4 + Rs. 2) × 4 weeks = Rs. 24 per unit
- Finished goods: Finished goods requirement = Selling price per unit × Weeks of finished goods = Rs. 12 × 6 weeks = Rs. 72 per unit
- Credit allowed by suppliers: Credit allowed by suppliers = Raw materials cost per unit × Weeks of supplier credit = Rs. 5 × 4 weeks = Rs. 20 per unit
- Credit allowed to debtors: Credit allowed to debtors = Selling price per unit × Weeks of debtor credit = Rs. 12 × 8 weeks = Rs. 96 per unit
Based on the given information, the working capital requirement can be calculated as follows:
Working capital requirement per unit = (Raw materials + WIP + Finished goods + Credit allowed by suppliers + Credit allowed to debtors) – Profit = (Rs. 30 + Rs. 24 + Rs. 72 + Rs. 20 + Rs. 96) – Rs. 1 = Rs. 241 per unit
Total working capital requirement = Working capital requirement per unit × Level of activity = Rs. 241 × 20,800 units = Rs. 50,16,800
Therefore, the working capital requirement for AXIL INDIA CO. Ltd. is Rs. 50,16,800.
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