Question

The gross profit of the X enterprise, which has an annual sales of $ 2,000,000, is $ 600,000. The activity information of the various elements of the X enterprise is as follows (days in the year 365)
Waiting time of raw material in stock: 20days
Time spent in production: 5 days
Number of days that cash and bank cash will cover against average daily payments: 5 days

Calculate the working capital need of firm X

Answer 1

Total Revenue from sales = $ 2,000,000

Total Gross Profit from Slaes = $ 600,00

Therefore total cost of sales = $ 2,000,000 - $600,00

= $1,400,000

  Waiting time of raw material in stock -  20days

Time spent in production - 5 days

Number of days that cash and bank cash will cover against average daily payments - 5 days

Therefore Total time taken complete a sales cycle = 20+5+5 = 30 Days

No. of Sales cycles a 364 days = 365/30 = 12.167

Therefore Working Capital Requirement = Cost of sales in a year/ No. of Sales cycle in a year

= $ 1,400,000/12.167

= $ 115,065 Answer