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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Gupta Ltd. expects to produce 36,000 units next year, evenly spread. Cost per unit is Rs 50. Raw material is 40% of cost and is held for 1 month; production takes half a month (assume cost is fully incurred at start, so WIP is valued at full cost); finished goods stay 1 month; debtors get 2 months' credit (at cost); creditors for raw material allow 1 month. Using a 12-month year and ignoring cash, what is the estimated net working capital requirement?

Net working capital is current assets less creditors. Computed values do not reconcile with the stated key, so this item should not be used.

  1. ARs 5,10,000Correct
  2. BRs 4,50,000
  3. CRs 6,00,000
  4. DRs 4,20,000

Explanation

Annual cost = 36,000 x 50 = 18,00,000; monthly 1,50,000. Raw material monthly = 40% x 1,50,000 = 60,000. Raw material stock 60,000 x 1 = 60,000. WIP 1,50,000 x 0.5 = 75,000. Finished goods 1,50,000. Debtors 3,00,000. Current assets = 5,85,000. Creditors 60,000 x 1 = 60,000. Wait, correct NWC = 5,85,000 - 60,000 = 5,25,000, which is not an option.

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