Question 16.1: Oliver Ltd’s sales revenue budget for 2010 is £5,300,000. Ol...
Oliver Ltd’s sales revenue budget for 2010 is £5,300,000. Oliver Ltd manufactures components for television sets and its production costs as a percentage of sales revenue are:
| % | |
| Raw materials | 40 |
| Direct labour | 25 |
| Overheads | 10 |
Raw materials, which are added at the start of production, are carried in inventory for four days and finished goods are held in inventory before sale for seven days. Work in progress is held at levels where products are assumed to be 25% complete in terms of labour and overheads.
The production cycle is 14 days and production takes place evenly through the year. Oliver Ltd receives 30 days’ credit from suppliers and grants 60 days’ credit to its customers. Overheads are incurred evenly throughout the year.
What is Oliver Ltd’s total working capital requirement?
| Production costs | |||
| £ | |||
| Raw materials | [40% × £5,300,000] | 2,120,000 | held in inventory on average four days |
| Direct labour | [25% × £5,300,000] | 1,325,000 | finished goods held in inventory on average seven days |
| Overheads | [10% × £5,300,000] | \underline{530,000} | |
| \underline{3,975,000} |
The production cycle is 14 days
| Working capital requirement | |||
| £ | £ | ||
| Raw materials | [£2,120,000 × 4/365] | = 23,233 | |
| Work in progress | |||
| Raw materials | [£2,120,000 × 14/365] | = 81,315 | |
| Direct labour | [£1,325,000 × 14/365 × 25%] | = 12,705 | |
| Overheads | [£530,000 × 14/365 × 25%] | = \underline{5,082} | |
| 99,102 | |||
| Finished goods | [£3,975,000 × 7/365] | =76,233 | |
| Trade receivables | [£5,300,000 × 60/365] | =871,223 | |
| Trade payables | [£2,120,000 × 30/365] | = \underline{(174,247)} | |
| Total working capital requirement | \underline{895,544} |