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# SOLUTIONS AND ANSWERS TO WORKING CAPITAL PROBLEMS – PART 1

## a. Operating cycle = 50 days + 25 days = 75 days

b. CCC = 75 days – 20 days = 55 days

## a. Inventory conversion/Days inventory = P10,000/P100* = 100 days

*Since daily CGS is not given and cannot be computed, it implies that daily sales
will be used to compute for the inventory conversion period.

## PROBLEM 3 (FINANCING WORKING CAPITAL): LEDDAH CO.

a.

Current Assets 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Cash P 40,000 P 20,000 P 25,000 P 30,000
AR 76,000 35,000 67,000 108,000
Inventories 40,000 85,000 89,000 30,000
Total P156,000 P140,000 P181,000 P168,000

Permanent Current Assets (lowest amount among all the quarters, 2nd quarter)
= P140,000

## Long-term financing = (P140,000/2) + P200,000 = P270,000

b. Aggressive – since more short-term financing is used (all of the temporary current
assets and half of the permanent currents assets).

## d. Conservative – since more long-term financing is used (permanent current assets

and fixed assets and half of the temporary or seasonal current assets).
II. WORKING CAPITAL MANAGEMENT- FLOAT MANAGEMENT

## a. Average daily disbursement float = P1,000 x (4+3+1 days) = P8,000

b. Average daily collection float = P1,500 x (3+2+1 days) = P9,000
c. Net float = P8,000 – P9,000 = (P1,000) cash not available/net collection float

## a. Average daily collection float = P40,000 x (2+2+1 days) = P200,000

b. Daily cost of the float = (P200,000 x 5%)/365 days = P27.40
c. Savings in a year = P40,000 x 1 day (day saved) x 5% = P2,000

## a. Cash freed-up up (daily)

= [P5M x 2 days (days saved)] + [P3M x 1 day (day extended)]
= P10M + P3M
= P13M
b. Amount of earnings per year = P13M x 12% = P1.56M
c. Net benefit (cost) of the collection center policy
= (P10M x 12%) – P700K
= P500K benefit, implement the collection center policy
d. Net benefit (cost) of the remote center disbursement system
= (P3M x 12%) – P800K
= (P440K) cost, do not implement the remote center disbursement system
e. Net benefit (cost) of the two centers/systems combined
= P1.56M – P1.5M
= P60,000 benefit, implement both systems combined

## a. Optimal transaction size

= SQRT [(2 x P20,000,000 x P18.75)/(7.5%)]
= P100,000
b. Average cash balance = P100,000/2 = P50,000
c. Annual holding cost = P50,000 x 7.5% = P3,750
d. No. of transactions in a year = P20,000,000/P100,000 = 200 transactions
e. Annual transaction costs = 200 x P18.75 = P3,750
f. Total annual cost of cash = P3,750 + P3,750 = P7,500
g. Total annual cost of cash if transaction size is P10,000 higher
= [(P110,000/2) x 7.5%] + [(P20,000,000/P110,000) x P18.75]
= (P55,000 x 7.5%) + (181.81 transactions x P18.75)
= P4,125 + P3,409.09
= P7,534.09
h. Total annual cost of cash if transaction size is P10,000 lower
= [(P90,000/2) x 7.5%] + [(P20,000,000/P90,000) x P18.75]
= (P45,000 x 7.5%) + (222.22 transactions x P18.75)
= P3,375 + P4,166.67
= P7,541.67

YEAR

## a. Optimal transaction size

= SQRT [(2 x P20,000,000 x P18.75)/(7.5%)]
= P100,000
b. Average cash balance = (P100,000/2) + P20,000 = P70,000
c. Annual holding cost = P70,000 x 7.5% = P5,250
d. No. of transactions in a year = P20,000,000/P100,000 = 200 transactions
e. Annual transaction costs = 200 x P18.75 = P3,750
f. Total annual cost of cash = P5,250 + P3,750 = P9,000

## PROBLEM 1 (ECONOMIC ORDER QUANITITY): CHINCHIN CORPORATION

SCENARIO 1 -

a. EOQ
= SQRT [(2 x 12,000 x P6)/(P1.60)]
= 300 units
b. Average inventory = 300/2 = 150 units
c. Annual cost of carrying inventory = 150 x P1.60 = P240
d. No. of orders during the year = 12,000/300 = 40 orders
e. Days will each order last = 300/(12,000/360 days) = 300/33.33 = 9 days
f. Annual transaction or ordering costs = 40 x P6 = P240
g. Annual cost of inventory = P240 + P240 = P480

## h. Normal lead time = 6 days

i. Average daily usage = 12,000/360 = 33.33 units
j. Normal lead time usage = 6 x 33.33 = 200 units
k. Reorder point = 200 units (the normal lead time usage since there is no safety
stock)
PROBLEM 1 (ECONOMIC ORDER QUANITITY): CHINCHIN CORPORATION

TO RESPOND

## a. Safety stock = (7.5 – 6 days) x 33.33 units = 50 units

b. EOQ
= SQRT [(2 x 12,000 x P6)/(P1.60)]
= 300 units
c. Average inventory = (300/2) + 50 =150 + 50 = 200 units
d. Annual cost of carrying inventory = P200 x P1.60 = P320
e. No. of orders during the year = 12,000/300 = 40 orders
f. Days will each order last = 300/(12,000/360 days) = 300/33.33 = 9 days
g. Annual transaction costs = 40 x P6 = P240
h. Annual cost of inventory = P320 + 240 = P560
i. Normal lead time = 6 days
j. Average daily usage = 12,000/360 = 33.33 units
k. Normal lead time usage = 6 x 33.33 = 200 units
l. Reorder point = 200 + 50 = 250 units

## Units short because of excess Number of times short in Probability of

demand during the lead time the last 40 reorder cycles Stock out
period
100 8 8/40 = 0.20
200 10 10/40 = 0.25
300 14 14/40 = 0.35
400 8 8/40 = 0.20

## Safety Probability Stock out in Stock Orders Expected Additional Total

stock of stock units1 out per stock out carrying Costs
level out costs2 year3 costs4 costs5
0 0.20 100 (100-0) P400 8 P640
0.25 200 (200-0) 800 8 1,600
0.35 300 (300-0) 1,200 8 3,360
0.20 400 (400-0) 1,600 8 2,560
P8,160 P0 P8,160
100 0.25 100 (200-100) P400 8 P800
0.35 200 (300-100) 800 8 2,240
0.20 300 (400-100) 1,200 8 1,920
P4,960 P900 P5,860
200 0.35 100 (300-200) P400 8 P1,120
0.20 200 (400-200) 800 8 1,280
P2,400 P1,800 P4,200
300 0.20 100 (400-300) P400 8 P640 P2,700 P3,340

## 400 0 (400 – 400) P0 8 P0 P3,600 P3,600

1 Units short because of excess demand minus the safety stock level
2 Stock out units x stock out cost of P4
3 Annual demand of 50,000 units divided by EOQ of 6,250 units = 8 orders per year
4 Stock out cost x probability x number of orders per year
5 Safety stock x annual carrying cost of P9 per unit

The optimal safety stock level represents the level that gives the lowest sum of stock-
out costs and additional carrying costs. Based on the computation above, the lowest
combined costs is P3,340 corresponding to the 300-unit safety stock level.