Page 156 - DMGT409Basic Financial Management

Unit 8: Working Capital Management

C. Net Working Capital (A – B) (47,45,000 – 12,10,000) 35,35,000 Notes

Contingencies allowance NIL
D. Average working capital required 35,35,000

Notes 26,000 units have been sold for cash
[ 1,04,000 x ¼ = 26,000] and credit sales for remaining units i.e. 1,04,000 is 78,000 only.

2. Profits are to be adjusted for income. Tax and dividend payments. For these reasons,

profits have been ignored.
3. All overheads are assumed to be variable. Presence of depreciation element in
overheads will lower the working capital requirement.

Case Study Mysore Lamps Limited
ysore Lamps Limited is a company specializing in the production of fl uorescent
lamps. The company has been maintaining the quality of its products and due
Mto the efforts of its marketing manager, the company has been able to capture
a sizeable share of the product market in the recent past. The company is planning to
expand in the same product line. Mr. Mysore, the Managing Director of the company, is
confronted with the problem of increasing working capital due to the expansion plans of
the company.
Mysore Lamps Limited was set up in 1991 with an authorized capital of ` 110 crore and
faced heavy competition in the initial years of commencement of business. During 2006,

the company could make a dent in the fluorescent lamps market and its position as on
December 31, 2006, was as shown in Exhibit 1.
Exhibit 1: Balance Sheet

(Rs. in lakhs)
Liabilities Rs. Assets Rs.
Capital 1500 Fixed assets 1000
Reserves 762 Current assets 1862
Long-term loan 400 Raw materials 200
Current liabilities 200 Work-in-progress 287
Finished goods 450 Accounts receivables 675
Bank overdraft 962 Cash 250
Total 4274 Total 4274
During the year 2006, the company was able to sell 50 lakh pieces of fl uorescent lamps a
Rs. 60 with a profit margin of 10 per cent. The raw material comprised about 50 per

cent of the selling price; while wages and overheads accounted for 12 and 18 per cent,
respectively.
As a policy, the company keeps raw material stock for two months of its requirements. In

order to make prompt supply to customers on orders received, finished goods stock for
two months requirements is maintained, and sales credit of 3 months is given to customers.
Due to the standing of the company in the market, the company is able to enjoy 2 months
from its suppliers. The production process is of 30 days duration.
Contd...

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