Chapter 6 Homework Questions

Chapter 6 Homework Questions
1. What do we mean by networking capital?

Ans. Net-working capital is essentially the distinction between current assets and
current liabilities. Here, the current assets in working capital are raw materials, work-
in-progress, completed merchandise, Inventory, Cash, Sundry debt holders, Prepaid
and advances, and transient stores and current liabilities are short-term leasers, bank
overdraft, Short term borrowings.
2. What does the DWC measure? Why is it important?

Ans. The working capital-to-sales-revenue ratio is known as DWC. It is a metric that
calculates how long it takes a business to convert its working capital into sales
revenue. Organizations that use this ratio in their activities are more effective than
those that do not. The more days of working capital an organization has, the less
productive it is.
Equation of Days Working Capital;
DWC = (Average Working Capital x 365)/Annual Sales
It's critical because: DWC helps investors keep a close eye on working capital declines
because they indicate that a company is overleveraged, accumulating receivables too
slowly, paying bills too quickly, and unable to extend or maintain sales. An increase in
days working capital, on the other hand, suggests that the company is underleveraged,
collects receivables too quickly, and has rapid sales growth.
3. What does the CCE ratio measure? Why is it important?
Ans. The cash and cash equivalent ratio assess a firm's overall liquidity as well as
its ability to exchange cash quickly. It represents an organization's ability to pay
short-term obligations and weather adverse economic conditions. CCE is
important because it represents the company's ability to pay all of its bills in the
short term, as well as the current economic situation. It also reduces the risk of
financial distress while preserving liquidity.
4. What do we mean by the cash conversion cycle? Explain how it works?
Ans. The cash conversion cycle (CCC) is a metric that calculates how long it
takes a company to convert cash flows from revenue from inventory purchases
and other sources. CCC is one of the few quantitative metrics that can be used to
determine a company's management and operations performance.
5. Explain the various types of inventories that a company has to carry?
Ans. There are four different categories of inventory:
1. Raw materials.
They're responsible for converting the inventory into finished goods.
2. Work in progress.
These expenses include labour, overhead, and raw materials, and they account for
a significant portion of the final product.
3. Finished goods.
Some products are ready to be sold to the general public.
4. Make a complete overhaul.
MRO (Maintenance, Repair, and Operating Supplies) inventory is another name
for it. It's the stock that's needed to sell and assemble finished goods.
Exercises:
EXERCISE 1: DAYS OF WORKING CAPITAL
2012 2013
Inventories $ 450,000 $490,000

Trade receivables 360,000 385,000
Sub-total 810,000 875,000
Trade and other payables 400,000 440,000
Net working capital $ 410,000 $435,000
Average daily revenue $6027 $6849

1. Calculate the Days of Working Capital for 2012 and for2013.
Ans. The formula for calculating days of working capital is below
(Inventories + trade receivables )-trade payables /revenue /365
2012 2013
(450000 + 360000 -400000)/6027 (490000 + 385000 -440000)/6849

=68 days (approximately) = 63.51 days (approximately)
EXERCISE 2: ECONOMIC ORDERING POLICY

A company decides to market its products more aggressively. Current sales are 60,000
units per year and are expected to increase by 20%. Carrying costs are $0.50 per unit, and
order costs are $10.00. The firm wants to minimize its inventory costs. Calculate the
company’s current economic ordering quantity.
Ans.
a)Annual demand = 60000 *120% 72000 units (old 60000 units)
b)Carrying cost $0.50
c) Ordering cost $10.00
d) Present EOQ = Square root 1549.19 or 1550 units

[(2*a*c/b)]
e) Revised EOQ after increase = 1697.05 or 1698 units.

Square root [(2*a*c/b)]
EXERCISE 3: NUMBER OF ORDERS PER MONTH
A company has decided to market its products more aggressively. Current sales are
30,000 units per year and are expected to increase by 50% next year. Carrying costs are
$0.20 per unit, and order costs are $7.00. The firm wants to minimize its inventory costs.
Questions
1. What is the projected economic ordering quantity?
2. What is the projected optimal number of orders per month?
Ans.
a)Annual demand = 30000 *150% 45000 units (old 30000 units)
b)Carrying cost $0.20
c) Ordering cost $7.00
d) Present EOQ = Square root [(2*a*c/b)] 1449.13 or 1450 units
e) Revised EOQ after increase = Square root 1774.82 or 1775 units.

[(2*a*c/b)]
g) No of orders = Annual demand/EOQ 25.35 or 26 orders per annum

=45000/1775
No of orders per month = 26 / 12 2.1666 orders

Chapter 6 Homework Questions

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Chapter 6 Homework Questions

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Chapter 6 Homework Questions

1. What do we mean by networking capital?

2. What does the DWC measure? Why is it important?

EXERCISE 1: DAYS OF WORKING CAPITAL

Inventories $ 450,000 $490,000

Trade and other payables 400,000 440,000

Net working capital $ 410,000 $435,000

Average daily revenue $6027 $6849

(Inventories + trade receivables )-trade payables /revenue /365

(450000 + 360000 -400000)/6027 (490000 + 385000 -440000)/6849

EXERCISE 2: ECONOMIC ORDERING POLICY

b)Carrying cost $0.50

c) Ordering cost $10.00

d) Present EOQ = Square root 1549.19 or 1550 units

e) Revised EOQ after increase = 1697.05 or 1698 units.

b)Carrying cost $0.20

c) Ordering cost $7.00

d) Present EOQ = Square root [(2ac/b)] 1449.13 or 1450 units

e) Revised EOQ after increase = Square root 1774.82 or 1775 units.

g) No of orders = Annual demand/EOQ 25.35 or 26 orders per annum

No of orders per month = 26 / 12 2.1666 orders

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