Page 211 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 4. Hindustan Engineering Factory consumes 75,000 units of a component per year. The
ordering, receiving and handling costs are ` 6 per order while transportation cost is ` 24
per order. Depreciation and obsolescence cost ` 0.008 per unit per year; interest cost
` 0.12 per unit per year; storage cost ` 2,000 per year for 75,000 units. Calculate EOQ.
5. The following information relating to inventory in WTS Ltd. is made available to you.
The company wants to introduce the scheme of ordering only the economic order quantity.
Annual demand : 480 units; Price per unit : `4
Carrying cost : 40 paise per unit; Cost per order : `5 per unit

Determine the economic order quantity. Also determine the number of orders per year
and frequency of purchases.
6. For balance sheet, what might be the significance of the extent to which inventory is
composed of raw materials, work in process, and finished goods?
7. Critically evaluate the explosion process.
8. What can be the limitations of First-in, First-out Inventory Method?

9. Is there any significance of cash flow time line in the inventory management? If yes,
elucidate upon the same. If no, why are they studied in combination under inventory
management?
10. Which method of inventory valuation do you think to be the best and why?

Answers: Self Assessment

1. mutual 2. opportunity
3. Carrying 4. VED (Vital, Essential, Desirable)
5. LIFO 6. temporary

7. centralized 8. XYZ and VED
9. explosion 10. increases
11. Cash Flow Timeline 12. interdepartmental

13. unit 14. Base stock
15. insensitive

12.8 Further Readings

Books D.R. Mehta, Working Capital Management, Prentice-Hall Inc., 1974.
K.V. Smith, Management of Working Capital, McGraw-Hill, New York.
Khan and Jain, Financial Management, Tata McGraw-Hill.

Pandey, Financial Management, Vikas Annex.54.J.3 -MBA - Finance - SDE Page
20 of 23.
Prasanna Chandra, Financial Management, Theory and Practice, Tata McGraw-Hill.

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