Financial management revision question and answer

Hafix Ltd. is a manufacturing company. Its projected turnover for the year 2002 is Sh.150,000,000. At present the costs as percentages of sales are as follows:


On average:
1. Debtors will take 2½ months before payment
2. Raw materials will be in stock for three months.
3. Work-in-progress will represent two months worth of half produced goods.
4. Finished goods will represent one month‟s production.
5. Credit will be taken as follows:

(i) Direct materials 2 months
(ii) Direct labour 1 week
(iii) Variable overheads 1 month
(iv) Fixed overheads 1 month
(v) Selling and distribution ½ month

Work-in-progress and finished goods will be valued at material, labour and variable expense cost.

Required:
Working capital requirements of Haffix Ltd. assuming the labour force will be paid for 50 working weeks in the year 2002. (20 marks)
ANSWER
The annual costs incurred will be as follows:

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