ABC Ltd has produced the following budget:

	£
Sales Turnover	1,800,000
Direct Materials	400,000
Direct Labour	500,000
Variable Overheads	100,000
Fixed Overheads	200,000
Selling and Distribution Overheads	50,000
Budgeted Profit	550,000

Pending use, inventories of raw materials are on average held for 5 weeks

Work in progress takes 4 weeks. Materials are used from the start of the process and it can be assumed that wages and variable overheads occur evenly throughout the manufacturing process.

Finished goods are on average held in inventory for 5 weeks, and are valued at Direct Costs plus Variable overheads. (Fixed overheads are not absorbed into the value of inventories).

Fixed overheads and Selling and Distribution overheads can be regarded as being incurred at the time that the finished goods leave the company.

On average, receivables pay 8 weeks after delivery.

The Company takes credit from its suppliers as follows:

Direct Materials – 5 weeks

Labour – 1 week

Variable overheads – 5 weeks

Fixed overheads – 4 weeks

Selling and Distribution overheads – 3 weeks

Assume that the company operates for a 52 week year.

Required:

(a) Calculate the operating cycle for the company

(b) Calculate the estimated average total working capital requirement that the company will need to finance.

(c) Outline the possible implications for the company of the working capital requirement calculated in (b) above.