Page 76 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 4: The Financing Mix

Debtors 15 Notes
Receivables 10
Cash 10
Others 8

Total 88
(a) Assess the MPBF using the second method of Tandon Committee (Current Liabilities
other than bank borrowings are ` 30 lacs).

(b) What will be the MPBF if the borrower brings ` 28 lacs as his Margin?
4. XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle indicates that materials
are introduced in the beginning of the production cycle; wages and overhead accrue
evenly throughout the period of the cycle. Wages are paid in the next month following the
month of accrual. Work-in-process includes full units of raw materials used in the beginning
of the production process and 50% of wages and overheads are supposed to be conversion
costs. Details of production process and the components of working capital are as follows:

Production of pipes 12, 00,000 units
Duration of the production cycle One month
Raw materials inventory held one month consumption
Finished goods inventory held for Two months

Credit allowed by creditors One month
Credit given to debtors Two months
Cost price of raw materials ` 60 per unit
Direct wages ` 10 per unit

Overheads ` 20 per unit
Selling price of finished pipes ` 100 per unit
Calculate:
(a) The amount of working capital required for the company.

(b) The maximum permissible bank finance under all the three methods of lending
norms as suggested by the Tandon Committee, assuming the value of core current
assets: ` 1, 00,00,000
5. What do you think as the reason behind the security-oriented system earlier existing in
India to have tended to favor borrowers with strong financial resources?

6. What problem is posed by the calculation of excess finance?
7. Critically evaluate the recommendations of Kannan Committee on cash management.
8. Do you think that discount houses as suggested by Chore Committee have any significance
in Indian parlance? Justify your answer with well grounded reasons.
9. Examine the significance of the recommendations made by Tandon Committee on cash
management.

10. Why do you agree/disagree by the third method of lending as suggested by the Tandon
Committee to be dropped?

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