TOPIC 1 : EXERCISE

DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

T1 : WORKING CAPITAL MANAGEMENT
PRACTICE QUESTIONS

WORKING CAPITAL POLICIES AND CASH MANAGEMENT

(Q1) Apple Sdn Bhd, Orange Sdn Bhd and Lemon Sdn Bhd are three companies that use different working
capital management policies. Their summarized SOFP are as follows :

Non-current assets APPLE SDN BHD ORANGE SDN BHD LEMON SDN BHD
Current assets RM RM RM

600,000 600,000 600,000
450,000 600,000 900,000

1,050,000 1,200,000 1,500,000

Equity 450,000 600,000 750,000
Non-current liabilities - 300,000 600,000
Current liabilities 300,000 150,000
600,000
1,200,000 1,500,000
1,050,000

Half of the current assets are temporary.

Required :
Discuss the working capital policies of the companies.

(Q2) Information below is about Tanjong Jati Berhad.

TANJONG JATI BERHAD
Statement of Financial Position as at 31st December 2020

Cash RM
Accounts Receivable
Inventory 50,000
Net Fixed Assets 120,000
60,000
Total Assets 210,000
440,000

Accounts Payable 60,000
Loans 180,000
Common Equity 200,000

Total Equity & Liabilities 440,000

Additional information :  Short term loan is 30% of the total loan.
You are required to:  EBIT is RM30,000 in year 2020. Assume 30% tax rate.

(a) Compute the net working capital, current ratio and return on assets (ROA).

(b) The Finance Manager wants to improve the liquidity of Tanjong Jati Berhad. He plans to issue
new shares and invest its return in marketable securities. Issuing of new shares will generate
net funds of RM40,000 and the rate of return on marketable securities is 6% per annum.
Calculate new net working capital, current ratio and return on assets (ROA).

(c) Explain the implications of the above proposal in terms of liquidity and profitability.

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

(Q3) Crystal Bhd is concerned about managing cash efficiently. On average, inventory is held for 90 days,
accounts receivables is collected in 60 days and accounts payable is paid 30 days after it arises.

Required :
(a) Calculate the firm’s cash conversion cycle (CCC).
(b) Discuss how management might be able to reduce the CCC.

(Q4) Mayne Sdn Bhd has an annual cash outlay of RM800,000. The firm’s average collection period is
60 days while it pays it creditors within 45 days. The firm has an average age of inventories of 90
days. Using a 365 days cycle, calculate the firm’s :

You are required to calculate :
(a) Cash conversion cycle
(b) Cash turnover
(c) Minimum operating cash

(Q5) Thyme Sdn Bhd settles its accounts payable on the 20th day after purchase. The average collection
period is 30 days , and the average age of inventory is 60 days. The firm currently spends RM21.6
million on operating cycle investments annually. The firm is considering a plan that would stretch
its accounts payable by another 20 days.

If the firm pays 10% per year for its financing, compute the annual savings it can realize by this plan,
assuming no discount for early payment of accounts payable and a 360-day year.

(Q6) Below is the summarized current assets and current liabilities of Mata Hati Sdn Bhd.

Current Assets RM Current Liabilities RM
Cash and marketable securities 50,000 Accounts payable 48,000
Accounts receivable 75,000 Bank loan 66,000
Inventory 67,000 Accruals 15,000
Total Current Assets 192,000 Total Current Liabilities 129,000

Sales for the firm amount to RM800,000 and cost of goods sold is 45% of sales. The payable deferral
period is 48 days. The firm’s annual working capital investment is RM600,000. The firm’s required
return on investments is 9%. Assume a 360-day year.

You are required to compute :
(a) The firm’s operating cycle.
(b) The firm’s cash conversion cycle (CCC).
(c) The firm’s annual savings if the CCC is reduced by 12 days.

(Q7) Jokomo Sdn Bhd has RM600,000 in excess cash and is planning to invest this in marketable
securities. A transaction fee of RM9,000 has to be paid for the company to trade in securities.

(a) If the yield is 14% and they are to be held for only 3 months, would you recommend this
investment?

(b) What minimum required yield would the securities have to return if they are held for 4 months
and to earn enough to cover the transaction fee as well as make an additional RM10,000 for the
firm?

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

(Q8) Prepare Cash Budget of a VADS Co. for April, May and June 2021 in a columnar form using the
following information.

Month Sales (RM) Purchases (RM) Wages (RM) Expenses (RM)

January (Actual) 80,000 45,000 20,000 5,000
February (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 6,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000

You are also further informed that:

 10% of purchase and 20% of Sales are for cash.

 The average collection period of the Co. is ½ month and credit purchase is paid off regularly
after one month.

 Wages are paid half monthly and the rent of RM500 excluded in expense is paid monthly.

 Cash and Bank Balance on April 1, was RM15,000 and the company wants to keep it on end
of every month below this figure, the excess cash being put in fixed deposits.

INVENTORY CONTROL

(Q1) Easy One Sdn Bhd is trying to determine the optimal order quantity for bulbs. Annual sales for bulbs
are 800 units and the retail price is RM300 per unit. The cost of carrying bulbs is RM50 per unit per
year. It costs RM35 to prepare and receive an order. The inventory planning period is one year.

Required :
(a) Determine the EOQ.
(b) Calculate the total costs if the company requires a safety stock of 200 units of bulbs.
(c) Compute the average inventory.

(Q2) Sri Pinang Enterprise is trying to improve its inventory control system. The firm anticipates sales
of 75,000 units per year, an ordering cost of RM8 per order and holding cost of RM1.20 unit per year.

Required :
(a) Compute the Economic Order Quantity (EOQ).
(b) If it takes 2 weeks to deliver an order, and Sri Pinang holds 1,000 units in safety stock,

determine the Reorder Point (assume 1 year = 50 weeks).

(Q3) Meritz Co. sells 90,000 tires every 12 months. The carrying costs are RM0.50 per tire for the same
months and the ordering costs are RM100 per order. The company has decided to maintain a safety
stock of 5% from yearly sales or 4,500 tires. The delivery time per order is 5 days (Assume a 360-
day a year).

Determine :
(a) The Economic Order Quantity (EOQ)
(b) The Total Inventory Cost
(c) The Reorder Point
(d) The Average Inventory

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

(Q4) Weel Arts Sdn Bhd has estimated that it requires 250,000 units of CDs an inventory for the year
2021. One unit of Cd will be purchased at RM1.50 each and will be sold at RM4.50 after processing.
The supplier has promised to deliver the order two weeks after an order has been placed. Costs per
order are estimated at RM50 and carrying cost will be 30% of the company’s selling price. Usually
Weel Arts carries 10,000 units of safety stock.

Assume there 50 weeks in a year, compute :
(a) Economic Order Quantity (EOQ)
(b) Total Inventory Costs
(c) Number of orders to be made in 2021
(d) Average Inventory
(e) Reorder Point

(Q5) Lime Sdn Bhd retails 10,000 units of air freshener gel. The cost of placing an order is RM80. The
wholesale price of a gel is RM5 per unit and the storage cost is 25% of wholesale price. If the safety
stock level is maintained at 300 units and the ordering period is 10 working days based on 220
working days in a year, calculate the following :

(a) The Economic Order Quantity (EOQ)
(b) The Total Inventory Costs
(c) Number of units at Reorder Point
(d) Average Inventory

(Q6) Yasheeca Sdn Bhd, a camera manufacturer needs 500,000 units of raw materials in a year. Handling
cost is 20% from its purchase price. Ordering cost is RM90. Purchase price for the material is
RM2.00 per unit. Management of Yasheeca Sdn Bhd has decided to have a safety stock of 15,000
units. Delivery time for the order is 7 days. Assume that Yasheeca Sdn Bhd working time is 50 weeks
per annum.

Answer the following :
(a) Compute the :

(i) Economic Order Quantity (EOQ)
(ii) Number of order per year
(iii) Reorder Level
(iv) Average Stock

(b) The decision related to inventory management involves the process of trade-off between risk
and return. Explain.

(Q7) Manjasari Enterprise sells 180,000 discs per year. Based on the company’s policy, a safety stock
of 4% from yearly sales is to be maintained. The carrying cost is RM0.45 per unit per year and the
ordering costs are RM180. The delivery time is 10 days. Assume 360-days per year.

You are required to calculate the following :
(a) Economic Order Quantity (EOQ)
(b) Total Inventory Cost
(c) Reorder Point
(d) Average Stock
(e) Annual number of order

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

(Q8) Denpasar Co. produces spare parts for cars. Total sales are 100,000 units per year. Selling price is
RM50 per unit. The restocking cost is at RM50 per order and the carrying cost is 20% of the selling
price. It takes 7 days to deliver the spare parts. Denpasar Co. also estimates 500 units as its safety
stock.

You are required to calculate :
(a) Economics Order Quantity (EOQ)
(b) Total Inventory Costs
(c) Reorder Point
(d) Average Inventory

(Q9) Cosmos Sdn Bhd is involved in the production of electrical parts and has the following inventory,
carrying and ordering cost :

 Order must be placed in round lots of 100 units.
 Annual unit usage is 500,000
 Carrying cost is 20% of the purchase price
 Purchase price is RM2.50 per unit
 Ordering cost is RM85.50 per order
 Estimated safety stock is 15,200 units
 Delivery time is 2 weeks ; assumption : 50 week per year

You are required to determine :
(a) The optimal EOQ level.
(b) How many orders will be placed annually?
(c) The average stock level.
(d) The stock reorder level.
(e) The annual inventory cost for the company if it orders in the EOQ.

(Q10) Turbolight Manufacturing expects to use 300,000 units of component coded as RR48 in the
production of a mechanical parts in the coming year. The price per unit is RM4 and the inventory
will be delivered within 2 weeks after the order is placed. Storage cost per unit is 25% of the price
and ordering cost is RM50 per order. Orders must be placed in multiple of 100 units and the desired
safety stock is 10,000 units.

With assumption 50 weeks in a year, calculate the following :

(a) Economics Order Quantity (EOQ)
(b) Total Inventory Costs
(c) Reorder Point
(d) Average Inventory

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

RECEIVABLES CONTROL

(Q1) Determine the effective annualized cost of forgoing the trade credit discount on the following terms :

(a) 1/10 net 20
(b) 2/10 net 40
(c) 3/10 net 60
(d) 3/10 net 90

(Q2) Intan Payung Sdn Bhd is considering changing its credit policy. In its efforts to improve its sales,
the firm seeks to relax its credit terms. You are given the following information to assess the firm’s
proposed plan :

Annual sales CURRENT POLICY PROPOSED POLICY
Contribution margin RM9.6 million RM12 million
60% 60%
Bad debt 1% 3%
Collection period 3 months 4 months
Required rate of return 12% 12%

Analyze which policy is better to be implemented by Intan Payung Sdn Bhd.

(Q3) Chloe Sdn Bhd credit sales amounting RM18 million and average collection period is 40 days. Bad
debt is RM480,000 and opportunity cost 16%. With assumption, the firm is producing one type of
product, variable cost is 70% from selling price.

The firm is considering changing its policy credit from net 40 to 1/20 net 60. If the firm make this
policy changes, 40% of total customer is expected to pay on the 20th day. While 60% will pay on the
60th day. It will increase average collection period from 40 days to 44 days.

Chloe Sdn Bhd is considering policy changes due to increase in credit sales by RM2 million. Bad
debt to increasing sales is 3.5%. Average inventory will increase from RM2 million to RM2.05 million.

Using Marginal Analysis, decide whether credit policy should be implemented by Chloe Sdn Bhd.

(Q4) Ancom Sdn Bhd currently has a very strict credit policy; its average collection period (or RTD,
receivable turnover in days) of 25 days is far below the industry average of 45 days. The firm is
considering relaxing its credit policy so that its collection period will be more in line with the
industry. Following is the information :

Present annual unit sales 300,000
Present selling price per unit RM25
Annual fixed costs on 0 to 400,000 units RM600,000
Present variable cost per unit RM20
Pre-tax opportunity cost of funds 20%

If Ancom Sdn Bhd relaxes its credit standards, it expects the following results, which are compared
with the present policy :

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DPA40103 FM2 ROSMARIA ISMAIL@PMK_DEC2020

Sales (in units) PRESENT POLICY PROPOSED POLICY
Bad-debt losses 300,000 360,000
RM360,000
RM150,000

You are required to evaluate whether should the proposed credit policy be instituted in place of the
present policy? Assume a 360-day year. Assume also that current customers will continue to pay
at the present rate.

(Q5) Nezuko Co. is currently considering the credit policy changes from 1/10 net 40 to 2/10 net 60 in
order to increase its sales. The firm uses marginal analysis to know whether the changes should be
made or not.

Following are the information with regards to the firm’s credit policy before and after the changes.

CURRENT POLICY PROPOSED POLICY
(1/10 net 40) (2/10 net 60)

Credit sales = RM100 m Expected credit sales = RM130 m
50% of customers take the discount 65% of customers take the discount
35% of customers pay on the 40th day 25% of customers pay on the 60th day
15% of customers pay on the 50th day 10% of customers pay on the 70th day
Bad debt = RM3 m
Inventory level = RM50 m Bad debt = RM5.2 m
Inventory level = RM55 m

Assumption :
Variable cost is 75% and required rate of return before tax is 14%.

By assuming 360 days a year, you are required to analyze as whether Nezuko Co. should implement
the proposed policy or not.

(Q6) Sancy Sdn Bhd is facing a great competition due to the entrance of new companies in the industry.
Therefore, the Managing Director requires all departments to propose a new strategy on how to
stimulate sales and increase the profitability.

You, as the Financial Manager of Sancy Sdn Bhd, is considering to change the credit policy in order
to stimulate the sales by relaxing the credit terms from ‘1/50 net 70’ to ‘2/60 net 90’. According to
the research done by you, the following information were obtained :

New sales level RM9,000,000
Current sales level RM8,000,000
Contribution margin 25%
% of bad debt 8%
Increment in inventory level RM60,000
Required rate of return 14%

With current credit policy, half of the customers took the credit discount offered. Based on the
research on customer response, this percentage is expected to continue with the implementation
of the new credit policy.

By using Marginal Analysis, prove that your proposed credit policy can be implemented. (Assume
360 days in a year).

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