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ABC Ltd is currently producing 2000 units per month
ABC Ltd is currently producing 2000 units per month. It is contemplating to increase the monthly production to 4000 units by working an extra shift such that the work started in the first shift will continue in an extra shift.
A quantity discount of 10% on all purchases is expected from the supplier. The selling price, variable cost, and fixed cost will remain unchanged.
Following is the Income Statement of the current year:
|
Sales (24000 units * Rs 18 p/unit) |
|
432000 |
|
Less |
|
|
|
Raw Material (24000 units * Rs 6 p/unit) |
144000 |
|
|
Variable Wages (24000 * Rs 3) |
72000 |
|
|
Fixed Wages |
48000 |
|
|
Variable Overheads (24000 * Rs 1) |
24000 |
|
|
Fixed Overheads |
96000 |
384000 |
|
Profit |
|
48000 |
Other Information:
- The credit period allowed to customers is 3 months and will remain the same.
- The lag period for payment of suppliers will remain the same at 2 months.
- Wages and overheads are paid with a lag of half month and will remain the same.
- Finished goods stock at present is maintained at 4500 units. This will double with a change in production.
- Raw material holding period is 3 months.
- The WIP period is 1 month and is valued at (RM + Wages). It is a practice with the company that, for WIP valuation, RM is taken at 100% and Wages at 50%.
You are required to prepare the Income Statement for next year after an increase in monthly production.
Also find out the working capital need for both, present and next year.
Expert Solution
1) Question Summary :
You are required to prepare the Income Statement for next year after an increase in monthly production.
Answer :
| Income statement | ||
| Present year | Next year | |
| 24000 units | 48000 units | |
| Sales | 432000 | 864000 |
| Less : | ||
| Raw material : ( present at 6 rs., next year at 5.40 Rs with 10% discount | 144000 | 259200 |
| Variable wages ( at Rs 3 per unit) | 72000 | 144000 |
| Fixed wages | 48000 | 48000 |
| Variable overheads at 1 Rs per unit | 24000 | 48000 |
| Fixed Overheads | 96000 | 96000 |
| Total cost | 384000 | 595200 |
| Profit ( Sales - Total Cost ) | 48000 | 268800 |
2) Question Sumary : find out the working capital need for both, present and next year.
Answer :
| Estimation of Working capital | Present year | Amount Rs. | Next year |
Amount Rs. |
| Current assets | ||||
| Debtors = sales * 3 months | 432000 * 3/12 | 108000 | 964000*3/12 | 241000 |
| Stock of finsihed goods Total cost * units | 384000*4500 / 24000 | 72000 | 595200*9000/48000 | 111600 |
| Stock of Raw mat Material cost * 3 months | 144000 * 3 / 12 | 36000 | 259200 * 3/12 | 64800 |
| WIP ( 100% RM + 50% wages * 1month) | (144000+60000) * 1/12 | 17000 | (259200 +96000)*1/12 | 29600 |
| Total CA | 233000 | 447000 | ||
| Current liabiites | ||||
| Creditors = Raw material * 2 months | 144000 * 2/12 | 24000 | 259200 * 2 / 12 | 43200 |
| Outstanding wages = total wages * 0.5/12 | (72000+48000) *0.5/12 | 5000 | (144000+48000)* 0.5 /12 | 8000 |
| Outstanding O/h = total O/h * 0.5/12 | (24000+96000) *0.5/12 | 5000 | (48000+96000)* 0.5 /12 | 6000 |
| Total CL | 34000 | 57200 | ||
| Net Working capital ( CA- CL) | 199000 | 389800 | ||
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