CHAPTER

SIXTEEN
IInnddian
Costing and
Pricing
Osre hsoldew
Thschapter addresses two key areas related to an economic transaction viz, cost of the
alue ol productand determination of its selling price and also explains the terms related to these Chapter Checklist
asbew Çoncepts. " Unit of Sale
" Unit Cost
l dren. Unit of Sale " Unit Price
In on This can be defined as the measure of unit in which the products are sold. So, unir of "Gross Profit
fvalue ale for apples will be kilograms. "Break-even Analysis
given
Tounderstand this further, a list of businesses with their respective unit of sale is
sirable below:
Business Item belng sold/servlced Unlt of sale

Grocer Rice Kllogram

at are
Milk Litre
Dairy
Oil Litre
Grocer
otlons, T-shirt Plece
Garment shop
roled Fabrlc Metre
Wert
Textile shop Time: Hour
Coaching class Tution

The above table hold goods if the business is dealing in one product only. But, for a
for example, 'Big-Bazaar' where one can buy rice,
to pay
busines dealing in multiple products, say 5litres ofoil and 2 t-shirts,
umilk, t-shirts, etc., and suppose a customer buys 2 kg of rice, 'number of customers' and
in the the unit of sale for Big-Bazaar will be
an instance,
hen in such
sale. Similarly, for a restaurant, the unit of salewill be 'diner and for a
ndlvidual unit of
tionIs Deauty parlour, it will again be a 'customer.
management tool that is required to understand the economics of the
Unt of sale is a for tracking progress over a number of
years
esare
ess in an easy and standardised way and
and taking corrective actions, when necessary.
206 Allin one Entrepreneurship Clas J

Unit Cost Gross Profit Brea

This can be detined as the cost incurred by acompany Excess of unit price over unit cot is known as This

t0 produce, store and scll one unit of sale of a particular gross profit or gross profit margin. This the w factivir
product or service. But, itshould be remembered hat unit repreents
busines's profit from selling a product before he che relaL

cost refers to the variable cost like raw material, packing

material, sales commission, freight, etc.
overheads or fixed expenses. deducting
So, Gross Profit Per Unit = Unit Price - Unit Com
producti
So, 2t
Note Voriable costs are directly proportional to the level of Tota
output. for a business deallng in multiple products, Example 2. Astationery store sold In one day, the
unitcost is the average cost of the products. following items at the prices Indicated.
So, if during aday, Big Bozaar sells varlous products to
50customers and the cost of the goods sold is Prlce per
Products unt () Ouantty eold
1,50,000, then the unlt cost will be 3,000 ( 1,50,000
+50]. Unit cost is also referred to as cost of goods sold. Student notebook 40 36
Reynolds pens 40 40 or Q
Unit Price Erasers 5 Note
Scale (12" plastic) 15 10
It is the price at which one unit of sale is sold. So, if Fllp chart 10 5
100 litre of milk is sold for 5,000, then unit price will be 25 Relate
R50 (5,000 +100). Sketch pens (one dozen)
In o
For a business dealing in multiple products, unit The shopkeeper also found out, based on the number thefollo
price is the average amount billed per customer. So, if the of bills Issued by him, that there were in all 50
50customers paid 1,75,000 for various items purchascd customers. If customer is the unit of sale, what ls the () Cont
by them from 'Big-Bazaar', then unit price willbe 3,500 unit price in this case? Itrefe
[ 1,75,000 + 50]. If the cost of each stationery item is 75% of its sellng also re
price, calculate the unitcost and the gross margin per
Example 1. Following are the details from the sales unit of sale.
It can
register of Big-Bazaar, Jabalpur on a particular
day. What will be the unit of sale and the unit Sol.
price? Billed
Product Prlce per Quantty
unit (P) () sold (0) mourt
Number of Per customer billed Total blled amount (P xO0
amount ()
customers Student notebook 40 35 1,400 Exampl
7 1,500 10,500 Reynolds pens 40 40 1,600 Find co
8 Erasers 5 5
2,000 16,000 25 Va
12 2,200 26,400 Scale (12" plastic) 15 10 15
13 Flip chart 10 5
Se
2,550 33,150 Sol. Cor
20 3,000 60,000 Sketch pens (one 25 3
dozen)
10 3,500 35,000 Total bllled amount 13,300 Pro
5 4,200 21,000
7 5.000 35,000 Unit Price= Total Billed Amount 3300
=66
18 6,000 1,08,000 Number of Customers 50 ) Profi
Total 100 3,45,050 Unit Cost = 75% of t66 =49.5 This r
Gross margin Per Unit =Unit Price-Unit Cost and t
Sol. Since, the customers purchased muliple items from
che retail store, therefore, the unit of sale will be =66- 49.5 =16.5 The fo
'customer. Formulae at e glance
Total Billed Amount P/V R
Unit Price= " Unit Price Per Customer = Total Biled Amount
Number of Customers Number of Customes
3,45,050 Unit Cost Per Product =Total Cost of Gooda Soid
-(3450.5 Unit of Salea
100 " Gross Profit Per Unit Unit price - Unit cost
ExampVariat
Find F
 207
Costing and Pricing

Sales - Variable Cost

Break-even Analysis Sol. P/V Ratio = Sales
refers to asystem of determination of that level
Thisanalysis
where total cost equals total selling
2,00,000- 1,20,000
= 0.4
price. portrays
It
ofactivity
relationship between cost of production, volume of 2,00,000
cConcepts, let us
sales value Note After understanding the above breah-even point.
production and the level. contlnue with determination of
So,at the break-even
Toral Revenue = Total Expenses Break-even Quantity for a Single
ie (Quantity Sold x Unit Price) =(Quanticy Sold Product
x Unit Cost) +Fixed Expenses Break-even Quantiy for a Single Product
Cost)
or Quantity Sold x (Unit Price - Unit
-Fixed Expenses Fixed Expenses
Gross Profit:Per Unit =Fixed Expenses Contribution Per Unit
or Quantity Sold x Unit Price - Unit
is just able to recover its flxed
Mete At breah-even point, firm and Contribution Per Unit =
expenses. Cost
Related Terms Example 5. From the information given below,
Limiled.
In order to understand the concept of break-even analysis, find the break-even quantity for LMN
understood: Fixed Expenses = 5,00,000
the followingrelated terms should be Unit Price = 6,000
) Contribution Unit Cost = 3,500
Itrefers to the excess of selling price over the variable cost. It is Sol. Contribution Per Unit = Unit Price-Unit Cost
also referred to as 'gross margin'. = 6000-3,500 = 2,500
It can be expressed by the following formula: Fixed Expenses
Contribution = Selling Price - Variable Cost Break-even Quantity =Contribution Per Unit
or Contribution = Fixed Cost + Profit 5,00,000
Profit =Contribution - Fixed Cost = 200 unis
2,500
Example 3. The following figures relate to company EFG.
Find contribution and also profit for the company. Break-even Quantity for Multiple
Variable Cost = 50,000, Fixed Cost = 21,000 Products
Selling Price =75,000 Break-even Quantity for a Business Dealing in
Sol. Contribution=Selling Price - Variable Cost Multiple Products
=75,000 -50,000 = 25,000 Fixed Expenses
Profit =Contribution-Fixed Cost Weighted Average Contribution Per Unit
=25,00021,000= 4,000 where, Weighted Average Contribution Per Unit
() Proflt/Volume Ratlo (PN Ratio) = Weighted Average Selling Price Per Unit
This ratio establishes a relationship between the contribution - Weighted Average Variable Cost Per Unit
or
and the sale value.
The formula can be expressed as: Weighted Average Contribution Per Unit
Sales -Variable Cost = Product A's Contribution x Product A's Sales
PIV Ratio =Contribution Mix Percentage + Product B's Contribution x
Sales Sales
Change in Contribucion Product B's Sales Mix Percentage (and so on for
Change in Sales ' number of products)
Note The respectve percentoge of a particular product
In the total sales is treated as weight for the
Example4. Sales = 2,00,000 purpose of the above computation.
Variable Cost = 1.20.000, Fixed Cost =40,000
Find P/Vratio.
208
Alin one Entrepreneurship

Computation ofBreak-even . Cakulate nval unitx o

Quantity Certalin Speciallsed
In uwing the nvnula.
breken
Conditions
()Sales Mix
Hrak nen Nunt in nits of Se M
Fixd Ct (") Weighted
Calculation Breakeven Polnt
es mi is the poNtin in
pdus whih mo o more
The calkulation methoi r the Sap 4.Cakulae number of unis of pdat
of sales mix is bund on the break-ven int hreak ven int.
method as disused above qontriburion apch
and the pronure
explained with che is Produet
helpofthe îllowing example Saes AN R
Example & Foow ing iniormatin is ekttet to () T Sreaken Lits
sales mix of p t A Band C.
Ant
Product A B C.
Sa 5, Cakulate breakven pMnt in nupees s i
Varebve Cos A unt Product
Saes M Percenta Prxct Unts at
Total Fred Cost ien Pont
{40000
(x)Prioe Per Ut
Calculate the break-even point in units and Proouct Saesin
in rupees.
Rupees
Sol. Sarp I. Cakulate the
unit for each produt. contribution mangin pet maa-een
Point in Aupees
Product A B
Saies Pre Per Unit () Multi-product Break-even Analysis
15 21 36
HVanabe Cost Pe Unt This approach finds breuk-even point fo ach
{9 14 R19
product in a in
Contribution Margin Per Unit multi-product compuny.
The calculation procedure is explained with the heip o e
Shep 2. Calculate che weighted average following example:
contribution
margin per unit for the sales mix using the
following ormulae: Example7. Toy Cratt produces toy alligatos and
Product A CM(Contribution Mix) Per Unit dolphins. Fixed custs are 12.90,000 per yearSeies y
× ProductA Sales Mix Percentage revenue and variable costs per urit are as foows
+ Product BCM Per Unitx Product B Algators Dolphine
Sales Pricoe 20
Sales Mix Percentage +Product C VariabBe Costs
CM Per Unit x Product C Sales Mix R8 10
Percentage =Weighted Average Unit () Suppose the company currently sells
l.40,000 alos e
year and 60,000 dolphins per yer (Sales
Contribuion Margin mix perceacage
:6). Assuming the sales mix stays constant,
Product
Saies Price Per Unt
A
alligarors and dolphins must the coampanybow
15 21 36 break-even?
( Varabie Cost Per Unt ?9 14 19 () Suppose the company currentty sells 60,000 alganos e
Contributon Margin Per Unit ?17 year and 1,40,000 dolphins per year (Sales mix
() Saies Ma Percentage 20% 20% 60%
pentng
6:14). Assuming the sales mix stavs constant, bow
12 R14 10.2 alligators and dolphins must the company sel to brealne
Sum : Weighted Average CM 12 80 per year
Per Unt (iin) Explain why the tocal number of rovs needed to break en
in (a) is che same and'or different from the number in
 Costing and Pricing 209
AliaDre

Sol. (i) Untts AJlgatore Dolphlne Total

1,40,000 80,000 2,00,000
Sales price per unlt 20 ?25
Varlable cost per unit ?8 ?10
CM Pr Uht Sales (A) 28,00,000 16,00,000 43,00,000
Variable cost (B) ?11,20,000 6,00,000 P 17,20,000
Contribution margin ?16,80,000 ?9,00,000 25,80,000
(A-8)
() Fixed cost 12,90,000
Net Income
and C 12,90,000

Weighted Average Contribution Margin =Total Contribution/ Total Units

=25,80,000 2,00,000= 12.90
Break-even Point =Fixed Cost/Weighted Average Contribution
=12,90,000/ 12.90 =1,00,000units
Allocating total units to each product based on expected units proportion =14:6
Alligators to be produced for break-even =1,00,000 x 14 =70,000 units
20
6 =30,000 units
Dolphins to be produced for break-even =1,00,000 x 20
So, Toy Crafts has to produce 70,000 toy alligators and 30,000 toy dlphins for break-even.
(i) Total
Alligators Dolphins
Unlts
80,000 1,40,000 2,00,000
Sales price per unit 20 25
Variable cost per unit 8 10
? 12,00,000 35,00,000 ?47,00,000
individual Sales (A)
Variable cost (B) 4,80,000 ?14,00,000 ?18,80,000
Contribution margin (A-8) 7,20,000 21,00,000 ? 28,20,000
elp of the (-) Flxed cost 12,90,000
Net Income R15,30,000

Weighted Average Contribution Margin = Toral Contribution/Toral Unics

oy
=28,20,000/ 2,00,000 = 14.10
units
Break-even Point = Fixed Cost/Weighted Average Contribution =12,90,000 / 14.10 =91,489
Allocating total units to cach product based on expected units proportion =6:14
6
=27,447 units
gators per Alligators to be produced for break-even =91489 x 20
entage 14
=64,042units
ow may Dolphins to be produced for break-even =91,489 x 20
sell o
dolphins for break-even.
So, toy crafts has to produce 27,447 toy alligators and 64,042 toy
different because of different weighted
(ii) The number of toys to break-even in both the above examples are
ators per
ercentage
OW many average contribution margin.
reak-eveo Revise your formulee Contribution = Sales - Variable Cost
Quantityx (Unit Price - Unit Cost) = Fixed Expenses Contribution x 100
reakeven Fixed Expenses Profit/ Volume Ratio =
Sales
i n(b). Break-even Point (in units) =Contribution Per Unit
Fixed Expenses
Break-even Point (in rupees) =Proft/ Volume Ratio
 AL

EXAM Practice
Very Short Answer Type Questions [1 Mark]
termed as what?
l. The measure ofunit in which products are sold is
sold.
Ans Unit of sale is the measure of unit in which the products are
Z. Whatis defined as the cost incurred by acompony to produce one unit of sale2
Ans Unit cost can be defined as the cost incurred by a company to produce, store and sell
of sale of aparticular product or service. It refers to the variable cost of production
3. The price at which one unit of sale is sold is referred to as what?
Ans Unit price is the price at which one unit of sale is sold.
4. Which term is used todenote the excess of price over cost?
Ans Excess of unit price over unit cost is known as the unit gross profit.
So, Gross Profit Per Unit = Unit Price - Unit Cost.

5. Which term is used to denote the output at which total revenue equals total cost?
Ans Break-even point is the level of output, at which total revenue is equal to total cost,.

6. Which costs are directly proportional to the level of output?

Ans Variable costs are directly proportional to the level of output.
7. Which costs are independent of the level of output?
Ans Fixed costs are independent of the level of output.

8. Give the formula for computing unit price per customer.

Total Billed Amount
Ans The formula for computing unit price per customer is
Number of Customers

9. Gross profit is the final profit ofa business. Defend or refute.

HOTS Ans Gross profit is not the final profit of the business as indirect expenses and overheads areyt:
be charged to it.

Short Answer Type Questions [2 Marks]

10. Explain the importance of unit of sale as a management tool.
Ans Unit
in anofeasy
sale isandamanagement
standardised tool
way.that is required
It helps to understand
a business the progress
in tracking economicsoverof the bu
a number
years and taking corrective actions, when necessary.
11, What is referred to as the excess of selling price over variable cost?
referredpi
Ans Contribution refers to the excess of selling price over the Itis also
gross margin. It can be expressed by the following formula:variable cost.
Contribution = Selling Price -Variable Cost or Contribution =Fixed Cost +Profit
 one Costing and Pricing 211
Ali

42 Which ratio establshes the relatlonship

between contributlon and sale value?
Ans Profit/Volume ratio establlshes a relationship between the contribution and the sale value.
The formula for computing proflt/volume ratio is
expressed as:
Profit/Volume Ratio = Contribution
Sales
13, Explain the concept of 'break-even point' with the help of an example. Delhl 2014
Ans 'Break-even point' is the point of production at which total sales equals total cost. It is the
Condition of 'no profit, no loss' for an enterprise. Suppose,a shirt manufacturer sells 100 shirts
1or r 50,000and histotal cost also amounts to R50,000, then the production of 100 shirts 15 nls
break-even point.
14. At zero level of output, total expenses are also zero. Do youagree? Why or why not?
one unt HorS Ans At zero level of output, total cost is not zero as the business has to bear certain fixed cost even
at this level, such as salary of the administrative staff, rent of premises, etc.
15. Glve the unit of sale' for the following businesses:
Mall, Restaurant, Cricket Match, Theatre.
Ans
Business Unlt of sale
Mall Customer
Restaurant Diner
Cricket match Spectator
Theatre Audience

Long Answer (LA-1) Type Questions [3 Marks]

16. Name and explain the concept which states that at a particular volume of production, a firm
CBSE 2008, 2007
HOTS neither makes a profit nor a loss.
point is the concept which states that at a particular level of production a firm is
Ans Break-even total
neither making any profit nor sustaining a loss. At break-even point, revenue equals the
COst.

704
TC yet to
60 Total sales
Total cost
50
()s0 B
40 BEP

30
usiness
mberof 20

10
ed to as 10 20 30 40
80 60 0X
Sales ()
point at whlch sales equals costs.
In the above graph, 'B' is the break-even
212 Allin one Entrepreneurship
Ali

17. Explain the concept of unit of sale, unit cost' and unit price.
Ans Unit of sale Refer to Ans. no. 1.
Unit cost Refer to Ans. no. 2.
Unlt prlce Refer to Ans. no. 3.
18. Fixed Expenses =Quantity Sold x Gross Profit Per Unit. How?
Ans We know that at break-even level, Total Revenue =Total Cost.
iLe. (Quantity Sold x Unit Price) =(Quantity Sold x Unit Cost) +Fixed Expenses
or Quantity Sold X (Unit Price - Unit Cost) =Fixed Expenses.
or Quantity Soldx Gross Profit Per Unit = Fixed Expenses.

Long Answer (LA-2) Type Questions 14 Marks]

19. Afoctory isengaged in manufacturing washing machines. The following information is ovolo
you:
Sales -4,00,000
Direct labour cost (2,000 units) = 40,000
Direct material cost (2,000 units) =? 1,00,000
Direct expenses (2,000 units) = 20,000
Fixed cost = 1,20,000
Find out
() Variable cost per unit
(i) Total Cost
(ii) Quantity to be sold at break-even point 2014C
Ans (i) Total Variable Cost =Direct Labour Cost + Direct Material Cost + Direct Expenses
= 40 000 +100,000 +20 000= 1,60,000
Total Variable Cost l60 000
Variable Cost Per Unit = =80
Number of Units 2,000
(iü) Total Cost =Total Variable Cost + Fixed Cost
=l60 000 +1,20 000 = 2,80,000
Fixed Cost
(iiil) Break-even Point =
P/V Ratio
Sales -Total Variable Cost 400,000 -160,000
P/V Ratio = =06
Sales 4,00 000
l,20,000 4,00 000 =(200]
Break-even Point= =2,00,000 (:Selling Price Per Unit =
06 2,000

Quantity to be Sold at Break-even Point =2,00 000-=1,000 units

200

20. Afoctory is engaged in manufocturing coolers. The following information is avallable to you
Sales =2,50,000
Direct labour cost (for 100 units) =25,000
Direct materialcost (for 100 units) =62,500
Direct expenses (for 100 units) = 12,500
Fixed cost =75,000
Alinone Costing and Pricing 213

Calculate
(0 Varlable cost per unlt
(U) Total cost
(I) Break-even polnt
Are dctual sales exceeding the sales requlred to break-pven2 If ves, then what values ore exhibited by
CBSE 2013
the business In achleving those sales?
AnS (() Varlable Cost =Dircct Labour Cost + Dlrect Material Cost + Direct Expenscs
=25000 +62,500 +12,500= 1,00,000
Variable Cost Per Unit = Variable Cost 100 000 =l000 per unit
Number of Units 100
(ii) Total Cost Flxed Cost + Variable Cost =75000 +100 000 = 1,75,000
(iii) Break-even Polnt = Fixed Cost
P/V Ratio
P/V Ratio= Sales -Varlable Cost 2,50,000-1,00,000 =06
Sales 2,50,000

Break-even Point=75000 =I,25,000

0.6
Yes, actual sales are more than the sales required to break-even.
Values exhibited by the business are as follows:
(i) Sustainable growth.
(ii) Responsible behaviour.

Essay TypeQuestions [6 Marks]

21. Calculate break-even point for a textlle shop on the basis of the given information.
HOTS Garments sold are siIk sarees, cotton sarees, sult materlals, klds wea.
Selling prices (in )
Silk sarees =3,500/ saree, Cotton sarees = 900/ saree
Suit materials = 1,800/ sult, Kids wear = 450/ wear
Variable cost
Silk sarees = 1,050 pleces, Cotton sarees =270 pleces
Suit materials =540 pleces, Kids wear= 135 pleces
Allocated fixed expenses
SIIk sarees = 245,000, Cotton sarees = 1,57,500
Sult material = 63,000, Kids wear = 70,875
Ans contribution Per Unit of Silk Sarees = Selling Price Per Saree -Variable Cost Per Saree
=3,500 -1050 =2,450
Contribution Per Unit of Cotton Sarees = Selling Price Per Saree - Variable Cost Per Saree
=900 -270 =630
Contribution Per Unit of Suit Material =Selling Price Per Unit - Variable Cost Per Unlt
=l800 - 540 =1260
Contribution Per Unit of Kids Wear = Selling Prlce Per Unit - Variable Cost Per Unit
=450-135 =315
Flxed Expenses
Break-even Point (in terms of quantity) = Contributlon Per Unit
 Co
214 Allin one Entrepreneurship

Accordingly, Break-even Point

2,45000 =100 sarees
For silk sarees =
2,450
1,57,500
For coIton sarces = = 250 sarees
630
63000
For suit material= -= 50 pieces
1260
70875
For kids wear = =225 pieces
315
Combined Break-even Sale (in ?)
=100 x 3500 +250 x 900 + 50 x l800 + 225 x 450)
=3,50 000 +225,000 +90 000 +101250 =7,66,250
22. Amanufacturing plant produces four different types of machinery tools and their
and price ore given below. The fixed costs ore allocoted -taking into considerotion varloble
the cost
common resources for different products and they are olso given separately for eoch prodie of
Here, is the basic data:
utlisotion
Products :AB,Cand D
Selling Price :1,00, 000; 50,000; 70,000 and 2,00,000 respectively.
Variable Cost : 30,000; 25,000; 30,000 and 1,00,000 respectively.
Alocated fixed expenses per month: 3,50,000; 2,50,000; 10,00,000 and 15,00.000
respectively. Compute break-even level for each of the product.
CBSE THO 24.
Ans Products A (9) B () C (9 DO
Unit Seling Price 1,00,000 50,000 70,000
Unit Variable Cost 30,000 25,000 30,000
2.00,000
1,00 00
Contribution Per Unit (Unit Seling 70,000 25,000 40,000
Price -Unit Variable Cost) 1,00 000
Fixed Expenses Per Month 3,50,000 2,50,000 10,00,000 15,00.000
Break-even Quantity = Fixed Expenses
Contribution Per Unit

So, Break-even Quantity for 'A'= 3,50,000 =5 units

70 000
2,50,000
Break-even Quantity for B' = =10 units
25,000
Break-even Quantity for 'C=10,00,000 = 25 units
40000
Break-even Quantity for D' = 15,00,000 =15 units
1,00,000

23. Afactory is engaged in manufacturing plastic buckets. The following

information is avalable to you
Sales = 1,00,000
Direct labour cost (1,000 units) =10,000
Direct material cost (1,000 units) =25,000
Direct expenses (1,000 units) = 5,000
Costing and Pricing 215

Fixed cost = 30,000

Find out
(O Voriable cost per unit () Total cast (li) Break-even point
Also. show how at break-even point, total revenue Is equal to CBSE 2010, 2004
total cost?
Ans Toral Variable Cost =Direct Labour Cost + Direct
Material Cost + Direct Expenses
=10000 + 25,000 +5,000 =40,000
(i) Variable Cost Per Unit = Total Variable Cost 40 000 =40
Number of Units l000
(ü) Total Cost =Total Variable Cost + Fixed Cost
= 40 000 +30,000 = 70,000
(ii) Break-even Point Fixed Cost
PV Ratio
PN Ratio = Sales -Total Variable Cost l00,000 -40.000 =0.6
Sales I00,000
Break-even Point (in upees) =30,000 (50 000
06
Break-even Point (in units) =50 000 =500 units
100
Total Revenue at S00 Units =500 x100 =50,000
Total Cost = Fixed Cost +[Variable Cost Per Unit xBreak-even Point (in units)]
=30 000+[40 x500] =30,D00 +20,000 = 50,000
So, it is verified that at break-even point, total revenue equals total cost.
24. Whot is break-even point? Why should entrepreneurs know abOut break-even point? CBSE 201l0 C
Ans Break-even polnt Refer to Ans. no. 13.
Entrepreneurs should know about the break-even point of their enterprise as it helps them to
take strategic decisions by providing them with the following information:
() Profitablity of products business can be known The profitability of different
products can be known with the help of break-even point. The problem of managerial
decision egarding temporary or permanent shut down of business or continuation at a
loss can be solved by analysing break-even point.
(ü) Effect of changes in cost and selling price can be demonstrated The effect of
changes in fixed and variable costs at different levels of production is conveyed to the
management through break-even point analysis. So, it helps the management to provide
for the requisites for the survival of the enterprise.
(ii)Cost control can be exerclsed The break-even point analysis shows the relative
importance of fixed cost in the total cost of a product. If the costs are high, it induces the
entrepreneur to take measures to control such costs. Thus, it is a managerial tool for
conrol and reduction of costs, elimination of wastage and achieving better efficiency.
(i) Forecasting and planning possible Break-even point analysis is very helpful for
forecasting, long-term planning, growth and stablity.
 Allin one
216
Entrepreneurship Cu Alin

Application Based Questions

Z3. The fixed expenses of Wick and Wack Limited is 2,75,000. The seling price of the to
the
Wack is the variable cost is 30 per unit. Find
50 and break-even quantity
HoTS break-even level.
Ans Fixed expenses = 2,75,000
=20
Contribution Per Unit = Selling Price - Variable Cost =50 -30
Fixed Expenses 2,75,000
.. Break-even Quantity =Contribution Per Unit 20
=13,750 units
Sales at Break-even Level = Break-even Quantity x Selling Price Per Unit
=13,750 x 50=6,87,500

26. Abeouty parlour had varying number of customers during 5 weeks. This informatlon and
of sale' and the unit price' Int the
HOTS weekly billing are in the following table. What are the unlt
the cost ofgoods sold or voriable cost is 60% of the sale price, calculatethe unlt cost this coaue
margin' per unit of sales. and the pa
Number of Total amount Average amount blled
CBSE TN
Weeks
Customers blled () ()per customer
Week 1 10 1,000 100
Week 2 17 1,445 85
Week 3 13 923 71
Week 4 22 5,082 231
Week 5 18 3,150 175
Total 80 11,600
Ans Unit of sale in this case is 'customer'.
Total Billed Amount 11,600
Unit Price =
Number of Customers 80
=145
Unit Cost =60% of Unit Price =60% of 145 =87
Gross Margin Per Unit of Sale =Unit Price - Unit Cost =145 -87 =58
27. Number of people who took their meals and the total billing for each of the 5 weeks s nt
HOTS following table. What are the unit of sale' and the unit price' in this case? If the variable cost öS
of the sale price, calculate the unit cost' and the gross margin' per unit of sale. CBSE T
Weeks Number of people Total amount Average amount
taking meals blled () blled ()
Week 1 120 18,000 150
Week 2 60 12,300 205
Week 3 70 10,220 146
Week 4 80 17,680 221
Week 5 90 21,600 240
Total 420 79,800
Ans Unit of sale in the above example will be 'diners', ie. people buying the
meals.
Unit Price = Total Billed Amount 79,800
Number of Diners 420
=190
Unit Cost =50% of Unit Price =50% of 190
Gross Profit Per Unit =Unit Price -Unit Cost =190 =95
-95 =95
 Costing and Pricing 217
ALiaDne

28. D0vi| has opened a restauront whlch serves Chlnese food. His flxed expenses per month are (z0,00
During the month of August his total sales revenue wOs also 20.000. Dvi| thinks that he nos
achleved the break-even level. Is he correct In his approoch?
Ans No, Divij is not correct in his approach because at brcak-even level, profits should be equal to
fxed expenses and not sales.
29. Rovi ls the owner of an umbrella manufacturing unt. During the month of June, in antcipation of
increase in demand, he produced 500 umbrellas. Total cost of production for umbrellos wos
e50,000. Out of the above, 10,000 were fixed expenses.
Find out the varlable expenses and unlt cost per umbrella.
Ans Variable Expenses =Total Expenses - Fixed Expenses
= 50,000-10,000 =40,000
Unit cost is cost per unit of the variable cost.
40,000
So, unit cost of umbrella = =80
500
 CHAPTER
EIGHTEEN
hos
to

oth
Working Capital
en
be and Inventory
Management
Ous
nks
elng Meaning of Capital
For starting up a new venture and also for efticient running of the present business or
it gowth and expansion plans, a business needs funds. These funds are termed as capital. Chapter Checklist
6 apital is money invested in business to generate income.
him Product B" Service B " Meaning of Capital
Service C
" Working Capital
ness B
Process
Service A" Product C " Inventory Control and
EconomicOrder Quantity
TANGIBLER " Pareto's Principle
the Process A Process
RESOUFRCES
" ABC Analysls of Inventory
Product A Process A Process C Control
Present " Economic Order Quanity
(value extraction) (EOQ)
" Re-Order Quantity (ROQ)
They
first
hem

Capltal ls llke roots of business troe

ne's
Need for Capital
Abusiness needs capital for:
0 Phocuring or investing in long-term assets such as land, building, machinery,
cquipments, etc. These assets are termed as fixed assets. Once invested in business,
the production
hey last over a reasonably longer period. They generally assist ininvested
Process and are not traded or sold to receive money. The money in these
aSsets is known as fixed capital.
" buying raw materials, packing materials, paying rent, insurance premium, utility bills,
Wages and salaries, etc. In other words, this is the money needed for day-to-day
operations of che business, The moncy necded to fund these cxpenses is known as
Working capital. This chapter limits itself to the srudy of working capital.
228 Allin One Entrepreneurship

Working Capital
Money needed fund the normal
to
Operating Cycle or Cash
Conversion Cycle (CCC)
operations of the business is known as workingday-to-day The duraion berween bunng
It refers to that pan of capital. the rr D
total capital,
required for holding current assets or it maywhich is receiving cash from he cusstomer is knowWn
detined as excess of aurrent assets
also be Cash Conersion Cyde. During the time
liabilities. over urrent raw material into end product.varnous requred
apenses
salary, etc are to be paid. Once the end produt i
(Working Capital =Current Assets be sold and monev received from customers
-Curent Liabilities] The Cash Conversion Crcke is the
() Current assets These are che Arm's purchase of inventory and thelengch of
apected to ger converted intoasset which ar
cash ot cash arounts meivables CCC represents che
receipt of
cquivalents within a period of one year. rm's cash remains tied up in the operationsnumbe
of tbe b
of .
Investment in current assets heips in day-to-day Different products will have iferent
operations of the business. They provide operating yls of a trading concem operaaing orde T
liquidity to the business. and a
Eampls of curreat asets in order of liquidiy
concern is explained below: TARuho y Co
are.
1. In a Trading Concern
(a) Cash in hand/Cash at
b) Marketable securiies
bank The operating cyde willindude the length of ime alkn
() Prozurement of goods
(c) Bills receivables () Realisaion of sales revenue
(d) Debtors
(e) Finished goods inventory
() Work-in-progress
(g) Raw materials
(b) Prepaid erpenses
(i) Current liabilities These refer to those liabiliies Deotors
g00ds
which are payable within a period of one year.
Examples of current liabilities are:
(a) Bills payable aies

(b) Creditors
(c) Oustanding expenses Operating Cycle or Cash
(d) Advances received from customers, etc.
Conversion Cycle for Trading Business
2. In a Manufacturing
Types of Working Capital Company
Operating yde is the length of time nerded o Comgke
There are rwo types of working capiral which are as the following
follows: () Conversion of cash
() Gross Working Capital (GWC) It refers to into raw materials.
investment in all the current assets aken ()Conversion of raw
togecher, iLe. materials into Debiors

Gross Working Capital = Sum Toral of all

Current Assets. work-in-progres
(i) Conversion of
(i) Net Working Capital (NWC) It refers to cxces work-in-progress into
of current assets over current liabilities, i.e. finished goods.
(in) Conversion of fnished
Net Working Capital
=Current Assets - Current Liabilities. goods inro accounts
NWCcan cither be positive or negative. receivable.
() Conversion of
If CA >CL, then NwCis positive and if CA< accounts receivable Operating Coe ar Ca
CL, chen NWCis negative. into cash. Conversion CVcle
Manutacturing Buines
 Working Capital and Inventory Management 229

Inventory Controland Varlous Aspects to be Consldered in the Process of

Economic Order Quantity Inventory Control
Aspects to be considered in this proces are as follows:
Meaning of Inventory 0 Space Space requirements for all ítens of inventory will not
in general sense, means the stock of be identical and neither will ít have any binding on the cost
Inventory
materials, semi-finished goods, consumables, of the product There can be many bullky ítems wich low
volume,
andIfinished goods or we can also say that cot eg rzw, 2s wel as high value items with low
pre parts like diamonds. Agood inventory con°ol system should keep
inentory is required directly or indirectly to make a in mínd the space requiremens for vaDous inventories
me(of the finished goods) and
may also represents needed by the busines.
finished
Aiferent stages in the process of geting the () Value All the items of an inventory are differently priced.
pod (Le the stock of raw materials and So, che value of the inventory should also be an important
ork-in-progres). In accounting sense, inventory Consideration for an effective conrol yssem. See more
ofallthe items in the inventory list
reerstothe value business.
about the value distribution under Paretos Principle later.
thatisowned by the (i) Lead time It is he time raken by manufacrurer to proaure an
Inventory Control item and is dependent upon a number of facors, viz
processing time, cheduling of machínes, disane berween
An effective inventory control system aims at: sOurce and point of use, cc Inventory contol syem has to
(0 Providing stock as and when the need arises. consider dhe above faors before formulating an cfective
lin Stock should be procured at minimum plan.
possible price. Gp) Standard made to order Some of he items of the
Inventory control has many facets as monetary, inventory may be standard and could be sourced from a
physical, safety and many others. It is crucial to number of suppliers. Other itens may be specific and can be
uodersand these aspects in designing an inventory sourced from certain uppliers only. An efective control
system considers chis aspect also.
ontrol system. (o) Seasonality of supply If he iem is an agriculrural product
KeyTerms (grains, vegrables, fruits, c), then is supply would be
The key terms related to inventory control seasonal. This can play a key role in designing the inventory
SyRen and various aspects to be considered are as control system.
folows: (v) Demand not uniforn or not predictable Demand for an
0Stock Keeping Unit (SKU)Code item could be seasonal, ie it may depend on weather
conditions, estival seasons, school opening dates, ec. So,
Each and every item in the inventory is to be demand for umbrellas, crackers, sweets, school uniforms,
identificd with a unique code which signifes etc., are esy to predict. But for other items it may not be
certain aspects of the item. This code is termed as casy to predict demand, eg requirement of a spare part So,
SKU code. The aspects specificd may be colour, an effective inventory control system has to formulate an
weight, size, any other important effecuive plan for forecasting demand, so that it is able to
characteristic. meet the demand succesfuly.
(vi) Shelf life Items like vegetables, fruits, fowers, fish, etc, are
The SKU code can be a combinarion of alpha perishable in narure. This calls for special storage conditions
and/or numeric symbols. SKU is the very basic and cquipments such as cold storage, freczers, ec These
unit for data collection, helps in deriving
meaningful information and decision-making. involve huge establishing costs. Similty, some of the
manufacrured food or medicines have crpiry dates, beyond
Bar codes and Radio Frequency Idenciiaion which thcy are not fit for consumption. The above factors
(RFiD) tags are used in tracking, using SKU impose cerain constrains on inventory management.
code.
(vii) Safery upecto Some of the items re hazardous in nature
0 Motley Crowd and special precautions have to be aken in their storage. eg
gAsoline and hazardous chemicals like phosphorus and
Inventory is
beterogeneous
basically a modey mir of
(different) assemblage of raw potassium chlorate. Inventory control sysem should ensure
safery of rmen, material and machines while deriving a plan
materials, packing materials, spare part, for cheir storage
emi-fnished goods, finished goods, ec.
Collecively, it is termed as modey rowd.
230 Allint one
Entrepreneursbip Cla Alin

ABC Analysis of
(r) Obsolescence Due to advancement of technology,
certain items may not be used and their value and Inventory Contro
ABC (Always Better Control) Examp
demand boch falls. So, this aspect of inventory analon ysis can
inventory control. It is based
ABC analysis, a company reviewsitsParetoS
management should also be kept in vicew by an

inventorPyincape
Categor
effective control system. all SKUs in three categories, called 'A!.
Atypical breakdown might look like this 'B and
Pareto's Principle 'A' inventory 10-20% of the items in
A

This principle was propounded by Vilfredo Pareto, account for 70-80% of the total value termu at qu C
an Italian economist, who studied land ownership in Italy of
in the early 1900's and found that roughly 20% of the 'B' inventory 15-259% of the items in items. Total
account for 10-20% of the total value terms of
population held title to about 80% of the land. For this of The
reason, Pareto's Principle is often referred to as the
"80/20 rule.
'C inventory 65-75% of the items in
account for 5-10% of the total value of terma of qua
inventory. cons

So, Pareto's principle basically states that 'A relatively Based on the above information it can be inveconclntoruyded. of
handful of things will generate the bulk of the results or
vital few, trivial many. The value of Parero's Principle in
inventory'A' is outstandingly importan,
average important and inventory invento'
valu

inventory management is in reminding us to stay focused

on the 20% that matters.
unimportant, 'Cis tota
So, more attention should be e devoted to of
to 'B' and still less to 'C:. inventory'N' Perc

Suggested Pollcy Guldelines for 'A', 'B', and 'C classes of Inventory
(A) Items (High Consumption Value) (B) Items (Moderate Consumption Value) (C) Items (Low Consumption Vaue
Very strict consumption control Moderate control Loose control
The
Novery low safety stock Low safety stock High safety stock carrying
Phased delivery (Weekly) Once in three months Once in 6 months Larger
Weekly control report Monthly control report Quarterly report
Smalle
Maximum follow up Periodic follow up Exceptional
As many sources as possible Two or more reliable Two reliable Note (
Accurate forecasts Estimates on past data Rough estimate
Central purchasing/storage Combination purchasing Decentralised
Maximum efforts to control lead time Moderate Minimumn clerlcal etforts Ecor
To be handled by Sr. officers Middle level Can be delegated Eco
most e

Note 'A' class items are closely monitored because of high value involved (70-80%). ABC analysis helps in an eficient and efecie order s.
inventory control. level. T
EO
factors:
1. Ord
The
stoc
 Working Capital and Inventory 231
Management
Example () Cost of placing an order
Number
Percentage Percentage (0) Cost of transportation
of total Value of total
Cagory ofteme number of items value
(i) Cost of receiving goods
10% 70000 70%
(iv) Cost of inspecting goods
100
20% 20000
There is an inverse relationship berween order size and
200 20%
700 70% 10000 10%
ordering cost.
Larger the order size Lower the ordering 00sts because
1000 100 100000 100 of fewer orders.
Totl
Theabove.schedule is represented graphically: Smaller the order size because
Higher theof ordering costs
more orders
consumption

100% C items
2.Carrylng Costs
The term carrying costs refer to the costs incurred in
of 90% maintaining a given level of inventory. These costs
8 tems

value
include:
0
total ()Cost of storage space,
of (i) Cost of handling materials,
Parcentage (i)Cost of insurance,
(i) Cost of deterioration or obsolescence,
(o) Cost of store staff, and
X (v) Interest on funds invested in purchasing the stock.
10 % 30 % 100 %
Percentage of Total Quantity Assumptions of EOQ
There is positive relationship berween order size and The computation of EOQ is based on the following
arying cost: assumptions:
Larger the order slze Higher the carrying costs because of () Prior knowledge of annualusage of inventory
high average inventory. (i) Constant rate of usage
Smailer the order size Lower the carrying costs because of (i) Constant ordering costs
low average inventory. (ip) Constant carrying costs
Note () There is an inverse relation between ordering costs and (u) Zero lead-time/delivery period
corrying costs.
() Average Inventory is half of econonmic order quantity. Determination of EOQ
EOQ can be determined wich the help of the following
Economic Order Quantity (EOQ) formla:
Economic Order Quantity is the quantity which EOQ =, where
most economial to order. It is the quaniy for which
order should be placed when the stock reaches re-order P=Cost of placing one order or ordering cost per order
lsvl. Therefore, it is also referred to as re-order quantity. D= Annual demand for the inventory
EOQ is determined afrer considering the following
actors: C=Inventory carrying cost per unit.
1. Orderlng Costs At EOQ level, ordering costs are equal to carrying costs
These costs refer to the cost incurred for acquiring
and their sum is the least possible cost likely to be incurred
on placing an order.
tock. These costs incdude:
232 All in one
Entrepreneurbip
at the rate of
Example 1. Annual quantity of jeans sold by a shop is 1200Inventory 100/-
ol placing an order and receiving goods is 500/- per
annum. What is the Economic Order Quantity (EOQ) for
order.
the shopkeeper? holding cOstperis pie30.o
Sol. Here, D 1,200: P-500 and C= 30
So, 2x Px D=1200,000
This divided by 30 = 40000
Square root of whlch is =200
So, the EOQ 0s 200 jeans.
Annual Consumption
Number of Orders Placed =
EOQ
Also find the number of orders placed, ordering cost and carrying cost at the level of EOQ
1200
=6 orders
200
. Ordering cost =6x 500 = 3,000
Average inventory =200 x =100 units
2
. Carrying cost =100 x 30 = 3,000
So, it can be observed that at EOQ, ordering cost and carrying cost are the same.

Re-Order Quantity (ROQ)

After understanding how much units to order, one should also know when place a
re-order level helps to determine just that. Re-order level is chat level of stock at which fresh otderorde
placed for replenishment of stock. It is computed wich the help of following formula:
Re-order Level =Maximum Rate of Consumption (MRC) x Maximum Re-order Period.
Example 2. The following information is taken from the cost records of Blue Chip Li.
Monthly consumption of component 'x' =100 -120 units.
Lead time or re-order period =4-6 days
Find the Re-order level
Sol. Re-order Level =Maximum Consumption xMaximum Lead Time.
Accordingly =120 x6 =720 units
So,new order should be placed when stock reaches 720 units.
 EXAM Practice
Very Short Answer Type Questions [1 Mark]
CBSE TBQ
1. Explain the term SKU' with an example.
Ans SKU stands for 'Stock Keeping Unit'. It is a code assignedto each and every item of inventoy
for easy identification and classification, It can be a combination of alpha and/or nunes
symbols. e.g. polyester cloth can be asslgned an SKU code of PY - 12.
CBSE TBQ
2. Explain Cash Converslon Cycle In short.
Ans The duration between buying the raw material and receiving cash from the customer is known
as Cash Conversion Cycle.
CBSE TBQ
3. Pareto's lawformed the bas/s for a technlque. Name it
Ans Pareto's law formed the basis for ABC analysis of inventory control.
a period of one
4. Which assets are expected to get converted into cash or cash equlvalents within
year? into cash or cash
converted
Ans Current assets refer to those assets which are expected to get
equivalents within a period of one year.
5. What does inventory mean in general sense?
materials, semi-finished goods,
Ans Inventory in general sense means the stock of raw
consumables, spare parts and finished goods.
What are these funds termed as?
6. For starting up a new venture, a business needs funds.
Ans These funds are referred to as 'capital'.
of a business in three categories-A, B' and
7. ABC analysis' of inventory control divides the inventoryafford
C. Amongst these three categories, a business could to maintain a high evel of safety stock
HoTS
of which inventory? Why? cost is
safety stock of 'C inventory as its
Ans A business could afford to maintain a high level of
less.
maintain a given level of inventory. Give
8. Carrying costs are those costs whlch are incurred to
examples of two such costs.
are:
Ans Examples of two such costs
(i) Cost of storage space.
(ii) Cost of insurance.
this level
ot which fresh order should be placed. What is
9. Give the formula for computing the level
referred to as? formula:
This level is referred to as 'Re-order level'. It is cumputed with the help of following
Ans (MRC) XMaximum Re-order Period
Re-order Level =Maximum Rate of Consumption
 pe
sheis, CBSETN CBSEC CRSF
bes CBSE
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CBSE 20200, insur
Ist6 pens bui
tems f folloe
orde nlb should
Whot value, various be 2009, rent
machinerýY,
Entrepreneurship generate S,000 t
in
inventory,
as an should What placed.
cost aBetter
inventory in In receiving Period
order. 000 is of 5-10% in
are CBSE as
will Purchase 00 EOQ and 10-20%
terms inventory order days. being Such
circulatesof Re-order reasons. use.
per =300the is building,
things ititsin
all is ch is inventory
which
contains orders and new
materials. 5 is production expenses
500 in
uniform. D So, 70-80%which
of order which time Maximum
order
two
Marks] ofhandful is Px 5,000. classifies
cost x inventory
money to orders
regard an raw lead
new
any consumerS, two.
land,for
2 is at for paying
one is OrderingSo,
Demand which company which because to placing of inventory order
a
when Give
reasons: any as
with regard available such
[2 relatively 6). consumption x Give
Consumption
units entrepreneur?
in rule. of of contains
inventory capital.
the and
capital decisions between placed? units followingto assets
All Questions
"80/20"year.cost. 20% root group capital? with of and 5=l500 readily
materials
purposes. materials
a =1·2Square analysis, working decisions
level 1,500 control'. costs.
that per purchase group circulating day being or fluctuations
ofdemand. long-term
contains C' circulating the time of the the
as C per of x be are holdingof
to quantity and =2,50,00,000.
states byl.2 "B' quantity.
terms
quantity.
of influence the to
rate Rate=300
should an inventory of
for materials
packing
Control) in
referred 500 quantity. manner the therefers itemorder
is for delivery number
to Level essential essential in
Type basically30,000 of
20%
group
of a called that influence
called
refersis It
It stock.
the
an
replenish new
Maximum.
inventory
and for:
a capital
investing
materials,
also is shopkeeper? of Re-order of promptcarrying for
Principle? P
7: 'A' of terms is
continued
factors It usage point units a is whether
advantages and
salaries,
etc.
Principle annum control capital
Answer
is pens
It
000
analysis?'C.terms
(Always
in 65-75%
and
in
capital
capital thattime when
Re-order300 Level of
= control
(iii)
stabilise
To
ensure control
needsor raw
Procuring
results. =30 divided
This 15-25% level
Accordingly, know
Paretos sellsper the
Pareto's ABC
in working
a threefactors of
Working
in (i)
Lead Rate uses
inventory
Re-order inventory Inventory needsbusinessBuying
shop D 10-20% the four
costfor Here, ABC B and any
assets
company To To To
the "A', The
Is EOQ
s Holding is In Explain
(ii)(ii) So, any (i) (ii) (iv) business A (i) (ii)
book of
Short
Whot Ans
the Ans
What Ans 13.
is
Why
Ans Ans levelAns is
Why StateAns Ans
A A A
10. 11. 12. 14. 15. 16. 17.
234
 Working Capital and Inventory 235
Management
48. Working capltal is of two types. Explain them brlefly.
Ans There are two types of working capital:
(i) Gross working capltal t refers to investment n allthe current assets taken together.
(ii) Net working capltal It refers to the excess of current assets over current labilities.
19. Whot kind of items are included in working capltal?
HOTS Ans Allitems of recurring nature are included in working canital which are either due for payment
or recovery in the courseof one year, e.g. arears of rent to be collected from tenant or areas
of rent to be paid to landlord.

20. Net working capital can be negative or pos/tive, but gross working copltal is always positive. Wny?
HOTSAns Net working capital is basically the difference between current assets and current liabilities.
current assets are more than current liablities, Net working capital will be positive. If On the
other hand, current liabilities are more than current assets, workíng capital will be negative.
But, gross working capital is the sum of current assets only, therefore it is always positive.
21. There is a positive relationship between order slze and carrying cost. Why?
Ans Larger the order size, higher the carrying cost because of high average inventory. Smaller tae
order size, lower the carrying cost because of low average inventory.
22. There is an inverse relationship between order slze and ordering cost. Why?
Ans Larger the order size, lower the ordering costs because of fewer orders. Smaller the order size,
higher the ordering costs because of more orders.
23. What are the costs incurred for acquiring stock referred to as? Give examples of such costs.
Ans The costs incurred for acquiring stock are referred to as 'ordering costs. These costs include:
(i) Cost of placing an order.
(ii) Cost of transportation.
(iii) Cost of receiving goods.
(iv) Cost of inspecting goods.
24. The computotion of EOQ is based on certain assumptions. What are they?
Ans The assumptions are as follows:
(i) Prior knowledge of annual usage of nventory.
(iü)) Constant rate of usage.
(itl) Constant ordering and carrying costs.
(iv) Zero lead time.

Long Answer (LA-1) Type Questions [3 Marks]

25. Explain inventory control and state its objectives. CBSE TBQ
Ans Inventory control involves the planning, organising efficiency
and controlling the procurement, storage
and economy.
and usage of stock so as toachieve the objectives of
The various objectives of inventory control are as follows:
(i) To avoid the situation of understocking and overstocking.
(iil) To ensure the procurement of good quality material at minimum cost.
(iii) To minimise ordering and carrying cost.
(iv) To avoid wastages and losses during storage and usage.
(v) To maintain proper and upto date records of inventory.
 CBSE
C 'z dunoa.
pes
D00+ Deli e asset *3
3)-4000
Allin
One 1,00,000
dividend
payable
Entrepreneurship
Sh Shot-te o
receiing Li credt = infome
76,000.
CoBculate requirement -2
weeks Company
current Debtors +6000
costswork-in-progress
a units
=20
=V400
bolonc
Investments)+44
Cash allowed following
Investments 000 material 3x
=3,01.00n+ and holding + x 000
is LiabilitieTax 50 12000
6,000 X Goods0,000+9
in + -+ material. e.g.raw are
items Payable -[32,000 capital the
+l000 20
Short-term +
for business.debtorsFinished
Short-term
+ 76D00] Materials vweeks, l) from =
following
investments 000
Current requiredThe 1x (P) 120
Assets Dividend working raw
week.
x 2,000
Q,000 year
+76 =1,14,000 of Working
Capital
Requirements 2 andfollows: orderx
Raw example.
cash + a for + 20 12
Total buying weeks labour) + the
the + DO0 +
Curent
Cash
Debtors
-Stock
D00
f
=6.000 is of perstored
which + =4000
x2xl) per 2x
+
(
-
debtors?75000 l00-Assets CreditorsTrade
l00 and cycle during cost
has short-term units
Enterprises, an Y 3 as
+
Debtors -301000-187000 between of
component
is calculated
+ @,000 (3M). 2PDC
all 75000+ + 200 Labour
materials with capital
operating
material
period (Material placed buying
who +75000 =l2
EOQ=,
of Current week= 12.000, =4,000 + 12%
Co Total week. time of lllustrate
of a 2) units,
61,000; + + +
(Stock 000 Vijay week=4,000=2,000 Cost raw partthe of Rawfor be 2x be
Work-in-progress =
ond Sum 000 =Total of units keptwill Q000x to inventory orders
=6
one per week =120
of 32000:
Roja SO |50 of 2,000
produced length requirement and Combined thatto
colculated? unit.
capital orders
oon = - is
cyclecycle weekper labour 1000 are
to reference units 100
(D) =l0o0x
Capital the refers
per goods of of 120 20
coptol Capital = material l
produce Working 20 usage
creditors
Short-term operoting week
production per is per of Operating
Cyde
= number
120 percentage =:
Working be gcde capital
chargescost capitol is
with cost
capital finished = (C) orders
Working to moterials + = order 100 annual
per Material
working
Cokculote soaps rawCombined to labourweeks. and consumption cost
? copitol.
trode
S0,000, the chorges Operating
Working
customer.
Labour
calculated
working
working planning per = as
of
StorageNumber
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236
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238