Workshop Working Capital Management MW has budgeted its sales to be €700 000 per annum. Its costs as a percentage of sales are as follows: Raw materials 20% Direct labour 35% Overheads 15% Raw materials are carried in stock for two weeks and finished goods are held in stock for three weeks. Production takes four weeks. MW takes four weeks’ credit from suppliers and gives eight weeks’ credit to its customers. If both overheads and production are incurred evenly throughout the year, what is MW’s total working capital requirement? Please note that work-in-progress is assumed to be half complete with regards to labour and overheads, but fully complete as regards raw materials, i.e. all the raw materials are added at the start of production. Solutions to Workshop Working Capital Management Annual costs: Raw materials: 700,000 × 0.20 =€140,000Direct labour: 700,000 × 0.35 =€245,000Overheads: 700,000 × 0.15 = Working capital requirement:€105,000€€Inventory of raw materials: 140,000 × (2/52) =5,385Inventory of work-in-progress:Materials: 140,000 × (4/52) =10,769 Labour: 245,000 × (4/52) × 0.5 =9,423Overheads: 105,000 × (4/52) × 0.5 =4,03824,230Inventory of finished goods: 490,000 × (3/52) =28,269Trade receivables: 700,000 × (8/52) =107,692Trade payables: 140,000 × (4/52) =(10,769)Working capital required:154,807 Note: work-in-progress is assumed to be half complete with regards to labour and overheads, but fully complete as regards raw materials, i.e. all the raw materials are added at the start of production.
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