Question

Q3)

• Level of Activity = 1,040,000 units
• Selling Price = PKR 20 per unit
• Raw Material Cost = PKR 8 per unit
• Labor Cost = PKR 3 per unit
• Overhead Cost = PKR 6 per unit
• Raw Material in Stock = 4 weeks
• Processing Time = 2 weeks
• Finished Goods in stock = 3 weeks
• Credit received from customer is 8 weeks
• Credit received from supplier is 6 weeks
• Delay in payment of wages is 4 weeks
• Delay in payment of overheads is 5 weeks
• Prepaid Expenses = PKR 20,000
• Outstanding Expenses = PKR 50,000
• Contingency is 5% of Gross Working Capital
• Calculate Gross working capital , Net working capital and length of the Working Capital Cycle?

Answer 1

1]	Estimated current assets:
	Receivables = 1040000*20*8/52 =	$ 32,00,000
	Raw materials = 1040000*8*4/52 =	$   6,40,000
	WIP = 1040000*(8+3+6*50%)*2/52 =	$   5,60,000
	[Assumed that OH is incurred uniformly over
	the processing period; hence taken at 50%]
	Finished goods = 1040000*(8+3+6)*3/52 =	$ 10,20,000
	Prepaid expenses	$ 20,000
	Total current assets	$ 54,40,000
	Contingency 5%	$   2,72,000
	Gross working capital	$ 57,12,000
	Current liabilities:
	Accounts payable = 1040000*8*6/52 =	$   9,60,000
	Wages payable = 1040000*3*4/52 =	$   2,40,000
	Overheads payable = 1040000*6*5/52 =	$   6,00,000
	Outstanding expenses	$ 50,000
	Total current liabilities	$ 18,50,000
2]	Net working capital [5712000-1850000]	$ 38,62,000
3]	Length of working capital cycle = 4+2+3+8-6 =	11	weeks