Question

A company located on the sea has the following cost sheet:
Cost per unit GH₵
Raw Materials 60
Direct Labour 20
Overheads       40
Total Cost      120
Profit             20
Selling Price 140
The following is also made available
• Average raw material in stock is equivalent to 30days
• Average material in process is 15 days
• Credit all owned by suppliers is 30days
• Time lag in payment of wages is 10 days
• Time lag in payment of overheads is 30 days
• 25% of sales are on cash basis
• Credit allowed to debtors is 60 days
• The company wishes to keep cash amounting to GH₵120,000
• Average finished goods in stock is 30 days

Required:
As a management consultant, you have been contacted to prepare a statement to be presented to the Board of Directors showing the working capital required to finance 70,000 units of output. Assume 365 days in a year.

Answer 1

Computation of working capital required for 70,000 units of output

Raw material in stock required = cost per unit * 70,000 * number of days / 365

Average material in process = cost per unit * 70,000 * number of days / 365

Credit owed to suppliers = cost per unit * 70,000 * number of days / 365. This reduces working capital requirement

Time lag in payment of wages = Direct labor per unit * 70,000 * number of days / 365. This reduces working capital requirement

Time lag in payment of overheads = Overheads per unit * 70,000 * number of days / 365.   This reduces working capital requirement

Credit sales outstanding = sales price per unit * 70,000*75%*number of days / 365

Average finished goods in stock = total cost per unit * 70,000 * number of days / 365

Raw material in stock required	70 * 70,000 * 30 / 365	402,740
Average material in process	70 * 70,000 * 15 / 365	201,370
Credit owed to suppliers	70 * 70,000 * 30 / 365	(402,740)
Time lag in payment of wages	20 * 70,000 * 10 / 365	(38,356)
Time lag in payment of overheads	40 * 70,000 * 30 / 365	(230,137)
Credit sales outstanding	140 * 70,000 * 75%* 60 /365	1,208,219
Cash balance required		120,000
Average finished goods in stock	120 * 70,000 * 30 / 365	690,411
Total working capital required		1,831,507