San Beda University

College of Arts and Sciences

Department of Accountancy
Managerial Accounting – Part 2

WORKING CAPITAL MANAGEMENT M. B. GUIA

Problem 1: Batangas Corporation has the following information:

Particulars January 1, 2017 December 31, 2017 Average
Cash P 140,000 P 120,000 P 130,000
Accounts Receivable 160,000 200,000 180,000
Inventory 200,000 300,000 250,000
Prepaid Expenses 30,000 30,000 30,000
Accounts Payable 75,000 100,000 87,500
Accrued Expenses 50,000 60,000 55,000
Batangas’ Net sales (all on credit) amounted to P 1,150,000 while cost of goods sold totaled P820,000.
Required:
1. Compute the company’s net working capital at beginning and end of the year.
2. Determine the company’s operating and cash conversion cycle for the year.

Problem 2: The following information were taken from the records of Laguna Corporation for the year
ended December 31, 2017:
Beginning Ending
Cash P 400,000 P 200,000
Accounts Receivable 100,000 320,000
Inventory 80,000 330,000
Marketable Securities 50,000 50,000
Accounts Payable 140,000 340,000
Dividend Payable 20,000 50,000
Short-Term Borrowing 0 350,000
Current Portion of Long-term Borrowings 180,000 160,000
Sales 9,400,000
Cost of Sales 6,600,000
Required:
1. Compute the company’s net working capital at beginning and end of the year.
2. Determine the company’s operating and cash conversion cycle for the year.

Problem 3: Jackson Electricals is one of the largest dealers of generators in Phoenix and sells about 5,000
of them a year. The cost of placing an order with their supplier is P765, and the inventory-carrying costs
are P170 for each generator.
Required:
1. Using the tabular method and the following order sizes, compute the EOQ of the generators (100,
150, 200, 250, 300)
2. Using the formula method, compute the EOQ and the total ordering cost and total carrying cost.
3. Assuming that the normal lead time is 3 days and a 250-working days, what is the company’s
reorder point?
4. In relation to the previous item, what is the reorder point if the maximum lead time is 5 days?
Problem 4: An automobile manufacturer uses about 60,000 pairs of bumpers (front bumper and rear
bumper) per year, which it orders from a supplier. The bumpers are used at a reasonably steady rate
during the 240 working days per year. It costs P 3.00 to keep one pair of bumpers in inventory for one
month, and it costs P 25.00 to place an order. A pair of bumpers costs P 150.00.
Required:
1. What is the EOQ?
2. What is the total annual expense of ordering the EOQ every time?
3. How many orders will be placed per year?
4. What is the total annual expense of ordering 600 pairs of bumpers every time? How much is
saved per year by ordering the EOQ?
5. Compute the re-order point considering that the Normal and Maximum lead time of the company
supplier is 4 days and 8 days respectively.

Problem 5: SaveMart needs 1000 coffee makers per year. The cost of each coffee maker is P 78. Ordering
cost is P 100 per order. Carrying cost is 40% of per unit cost. Normal Lead time is 5 days. SaveMart is
open 250 days/yr.
Required:
1. What is the optimal order quantity & ROP?
2. At EOQ, how much is the total inventory management cost?
3. If the maximum lead time is 7 days, how many units should be the safety stock? What will be the
re-order point?

Problem 6: Currently, Laguna Corporation sales is at P300,000, and average collection period is at 30
days. A proposed policy of relaxing the company’s credit term will result to a 20% increase in sales,
however, collection period is expected to increased to 60 days. Gross margin is 30% of sales and the
Laguna’s cost of capital is at 12%.
Required:
1. What is the additional interest on investment in accounts receivable?
2. What is the net advantage (disadvantage) of the proposed policy?

Problem 7: Dharma Putra Corporation, which has idle capacity, provides the following data:
Selling price per unit P 80
Variable cost per unit P 50
Fixed cost per unit P 10
Annual credit sales 300,000 units
Collection period 2 months
Rate of return 16%
The corporation is considering a change in policy that will relax its credit standards. The following
information applies to the proposal:
 Sales will increase by 20 percent.
 Collection period will go to 3 months.
 Bad debt losses are expected to be 3 percent of the increased sales.
 Collection costs are expected to increase by P 20,000.
Required: Determine if Dharma Putra Corporation should offer the new terms?

Problem 8: Lie Dharma Putra Corporation is considering liberalizing its credit policy to encourage more
customers to purchase on credit. Currently, 80 percent of sales are on credit and there is a gross margin of
30 percent. Other relevant data are:
Currently Proposal
Sales P 300,000 P 450,000
 Credit sales P 240,000 P 360,000
Collection expenses 4% of credit sales 5% of credit sales
Bad Debt Expense 1.5% of credit sales 2% of credit sales
Accounts receivable turnover 4.5 3
Required: Determine if Lie Dharma Putra Corporation should offer the new terms?

Problem 9: Romblon Rug’s Repair Corporation is trying to decide whether it should relax its credit
standards. The firm repairs 72,000 rugs per year at an average price of P32 each. Bad debt expenses are
1% of sales, the average collection period is 40 days and the variable cost per unit is P28. Romblon
expects that if it does relax its credit standards, the average collection period will increase to 48 days and
that bad debts will increase to 1 1/2 % of sales. Sales will increase by 4,000 repairs per year while fixed
collection cost will increase from P 24,000 to P 32,000 per year. The firm has a required rate of return on
equal risk investments of 14%.
Required: What is the net benefit or cost if Romblon will relax its credit standards?

Problem 10: It takes Laguna Corporation about 2.5 days to receive payment from the mail, another 1.5
days to process it and 3 days for the checks to clear the banking system. Therefore, a lockbox system is
being considered. It is expected that the system will reduce the float time to 5 days. Average daily
collections are P 500,000. The rate of return is 12 percent. Annual service charge is expected to be
P100,000.
Required:
1. How much collection float (in days) does the firm currently have?
2. Should Laguna utilize the lockbox system?

Problem 11: Benta Inc. is a retail mail order company that currently uses a central collection system that
requires all checks to be sent to its Quezon City headquarters. An average of 5 days is required for mail
checks to be received, 4 days to process and 1.5 days for the checks to clear through its banks. A
proposed lockbox system would reduce the mail and process time to 3 days and check clearing time to 1
day. Benta Inc. has an average daily collections of P100,000.
Required:
1. If Benta Inc. should adopt the lockbox system, what would the increase in its average cash
balance be?
2. If the company’s investment rate is 15% and the lockbox system will have a service charge of P
80,000 annually, should Benta adopt the lockbox system?

Problem 12: Tagaytay Company has an agreement with China Bank in which the bank handles P 3
million in collections a day and requires a P 700,000 compensating balance and a service charge of P
50,000 annually. Tagaytay is thinking of canceling the agreement and dividing its western region so that
two other banks will handle its business instead. Bank A will handle P 1 million a day of collections,
requiring a compensating balance of P 300,000 and annual service charge of P 40,000, and bank B will
handle the other P 2 million a day, asking for a compensating balance of P 500,000 and an annual service
charge of P 60,000. Tagaytay’s financial manager anticipates that collections will be accelerated by 1/4
day if the western region is divided. The company’s rate of return is 14 percent.
Required: Should Tagaytay cancel the agreement and divide its western region?

Problem 13:: Cavite Corporation needs P 1,000,000. The following are the different options that the
company has in order to raise such funds:
1. Loan with interest at maturity of 21%
2. Loan with interest, taken in advance, at the rate of 18%
3. Loan with interest of 17% at maturity, and a required compensating balance of 20%
4. Loan with interest of 16% discounted, and a compensating balance of 15%
 5. Loan with interest of 18% at maturity, and a 15% compensating balance that earns 4%
6. Loan with interest of 15% discounted, and a 30% compensating balance that earns 5%
Required: Compute the cost of financing under each of the independent arrangement.

Problem 14: Compute the cost of foregoing the discount under the following terms:
1. 2/10, n/30 2. 4/15, n/40 3. 3/20, n/60 4. 1/15, n/45

Problem 15: Suppose that the interest rate on Treasury bills is 8%, but every sale of bills cost you P20.
Your firm pays out cash at a rate of P 105,000 per month.
Required: Compute for the optimal capital transaction size and the average cash balance.

Problem 16: You estimate a cash need for P 4 million over a one month period where the cash account is
expected to be disbursed at a constant rate. The opportunity interest rate is 6 percent per annum or 0.5
percent for a one-month period. The transaction cost each time you borrow or withdraw is P 100.
Required: Compute for the optimal capital transaction size and the average cash balance.