Virtual University of Pakistan Study forum !
Super Manufacturing Company (SMC) is a medium scale but highly profitable unit engaged in the processing of food items contributing well in the country’s Rs. 1,000 million food industry. The company’s after tax profit has been reached to the tune of 63% over the past 7 years. Much of this is due to the efforts put in by its Financial Pl anner – Mr. FP, whose su ccess can be traced to financial planning and forecastin g of short term assets and liabilities. But, still he is much concerned about
working capital management to maintain a balance between liquidity and profita bility of the company. For this, he along with his team has chalked out an estimate about the company’s overall working capital needs. He has also done de tailed analysis of cash and inventor y to determine optimal level for the working capital for the Financial Year 2013.
The following are the estimates in this regard:
SMC takes 1½ month to materialize its a ccount receivables in cash. Material Alfa is held in the stock for a quarter. Work in process remains in the production for 30 days to complete. It takes 2 months to sell the finished goods held in the stock.
1. Figure out the working capital requirement (net) for the year 2013;
2. Mr. FP can arrange cash from a local bank in multiple of RS. 50,000 at a fixed cost of Rs. 2,500 for each multiple, whereas interest rate is 15% and deposit ra te is 8%. What would be the optimal cash holding level for SMC at this po int of time to meet annual requirements of Rs. 150,000? Also determine the number of years, this finance (optimal cash level) will be enough for SMC? (5 marks)
3. To meet the above estimated annual sales, monthly requirements have been determined at 500 kg of material Alfa . Present ordering cost is Rs. 70 per order, whereas material Alfa is priced at Rs. 75 per kg. Holding cost is estimated at 3% of the purchase price. At present, its monthly
requirement is 500 kg. EOQ has been determined at 611kg. Recently, the supplier has offered SMC a trade discount of 3% subject to the or der size of 300 kg. Determine whether the new discount policy is acceptable to SMC or not. Support your answer with complete working. (8 marks)
(Formulas and complete working is mandatory, as it carries marks)