Argo Co. is a small manufacturer of automobile components catering to the after-market. You are the Finance Manager of Argo, and you are in the process of finalizing the annual budget, and estimating working capital requirement for next year. As per the business plan, Argo expects to sell approx. 4,000 units of products per month. The average selling price per unit is Rs 625.

Raw material cost is estimated at Rs 270 per unit. Argo has 20 employees and the average wages paid is Rs 3 lac per employee p.a. Manufacturing costs: Rs 24 lac p.a., Administrative and General expenses: Rs 12 lac p.a., and Sales Promotion expenses: 7% of sales. Based on past experience, Argo Co. needs to keep one month stock of Raw materials, fifteen days stock of Work-in-Progress, and one month stock of Finished Goods. Of the total sales, 70% are on credit period of two months, and balance 30% sales are on cash basis. Argo gets forty five days credit from its raw material suppliers. Manufacturing costs, and Administrative and General Expenses are paid one month is arrears. Wages are paid as incurred. Sales promotion expenses are paid quarterly, in advance. The company has a policy of maintaining a minimum cash balance of Rs 2 lac.

Q1. Calculate working capital requirement of Argo Co. on cash cost basis. Assume a 10% safety margin. (12 marks)

Q2. Calculate the Operating Cycle of the company. Which is its largest component of its Operating Cycle?(3 marks)