WC Management Sample Problems

Sample Problem 1.
Basic working capital policies

Tarlac Joni expects the following policy data with regard to its working capital operations in 2019.
Working Capital Policy
Conservative Aggresive
Net Sales P10 million P10 million
Current assets as a % of sales 25% 10%
Fixed assets P1 million P1 million
Debt-equity rate 50:50 50:50
Interest rate 10% 10%
Tax rate 30% 30%
Profit before interest and tax P800,000 P800,000
Required: Determine the return on equity in each of the policies.
Sample Problem 2. Cash conversion cycle

Luke Company has an inventory conversion period of 60 days, a receivables conversion period of 45 days, and a
payment cycle of 30 days. What is the length of the firm’s cash conversion cycle?
Sample Problem 3. Cash conversion cycle

Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are
P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. What is the
length of the company’s cash conversion period?
Sample Problem 4. Optimum cash balance

Pure Gold Corporation expects to make even monthly cash payments of P160,000 during the year. The average return
on money market placements is 8% per annum and it expects to pay P250 per cash transfer. Using the Baumol Model,
determine the following:
1. Optimum cash balance per transaction
2. Average cash balance
3. Number of cash transfer per year
4. Total relevant cost at the optimum cash balance
5. Total relevant cost at the following cash transfers:
a. P 50,000
b. P400,000\
Sample Problem 5. Change in credit policy

Robert Company is considering to change its credit policy from 2/10, n/30 to 2/15, n/45. This change would push the
2019 sales to reach P48 million, or an increase of 20% from last year’s. Ninety percent of total sales would be on credit.
Eighty percent of credit customers are expected to avail of the discount offered by Robert Company. Accounts
receivable at the end of year is estimated at 15% of sales. Variables costs ratio shall be maintained at 75%.
In relation to changing the credit terms, collection costs would increase by 10% of the incremental sales. Doubtful
accounts are expected to increase from 1% to 2.75% of credit sales. The effective rate of return on a given investment
is determined at 12%.
Required: Should Robert Company change its credit policy in 2019?

Sample Problem 6. Change in collection policy
Golden Corporation is studying a proposed collection system that will decrease collection period from 45 days to 30
days. To do this, administrative costs in relation to collection activities are expected to increase by 30% of net sales,
which is projected to remain at P30,000,000. The effective rate of return prevailing in the market with the same type of
investment risk is 12%.
Required: Should Golden Corporation institute the change in the collection system?
Sample Problem 7. Ordering Costs

Big City Corporation expects to use 10,000 units of material XPC per month in 2019. Last year, total ordering costs
amounted to P200,000 for a total of 40 orders. It is expected that prices in 2019 would be 10% higher than that of last
year. Determine the expected ordering costs in 2019 if the company orders in a batch of 12,000 units or 24,000 units.
Sample Problem 8. Total carrying costs

In 2019, Fit it Company incurred a total of P800,000 for inventory carrying costs with an average inventory of 200,000
units. What would be the total carrying costs in 2019 if the order size is 500,000 units of 900,000 units, assuming the
Company does not maintain safety stock quantity.
Sample Problem 9. Economic order quantity

Brady Sporting Goods, Inc. buys a baseballs at P200 per dozen form its wholesaler. Brady will sell 36,000 dozen
baseballs evenly throughout the year. Brady desires a 10% return on its inventory investment. In addition rent,
insurance, taxes, - etc., for each dozen baseballs – in inventory is P4.00. The administrative cost involved in handling
each purchase order is P100.
Required.
1. Determine the Economic Order Quantity (EOQ) in dozens.
2. Assuming Brady ordered in order sizes of 800 dozen evenly throughout the year, determine the total annual
inventory costs to sell 36,000 dozen baseballs.
3. Assuming that is takes 3 working days to receive the order once it is placed, determine when Brady should
place an order (reorder point). Assume a 300-day year.
Sample Problem 10. Reorder point

Linda Corporation has the following production data:
Annual requirement 40,000 units
Number of working days 320 days
Normal lead time 10 days
Maximum lead time 16 days
Maximum usage 150 units
Economic order quantity 5,000 units
Required: Determine the lead time quantity, safety stock quantities, reorder point and maximum inventory levels.

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Sample Problem 1.

Basic working capital policies

Required: Determine the return on equity in each of the policies.

Sample Problem 2. Cash conversion cycle

Sample Problem 3. Cash conversion cycle

Sample Problem 4. Optimum cash balance

Sample Problem 5. Change in credit policy

Required: Should Robert Company change its credit policy in 2019?

Sample Problem 7. Ordering Costs

Sample Problem 8. Total carrying costs

Sample Problem 9. Economic order quantity

Sample Problem 10. Reorder point

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