Statement - I : Working capital leverage measures the responsiveness of Return on Equity for changes in current Assets. Statement - II : When the annual demand for an item is 3200 units, unit cost ₹ 6, inventory carrying charges 25% p.a. and cost of one procurement ₹ 150, the economic ordering quantity would be 700 units. Codes :
Both statements are incorrect
Statement I: working capital leverage measures the sensitivity of the return on investment (return on capital employed) to changes in the level of current assets, not the return on equity. So Statement I is incorrect.
Statement II: the economic order quantity is \(EOQ = \sqrt{\frac{2AO}{C}}\), where A = annual demand, O = ordering cost per order and C = carrying cost per unit per year.
Here C = 25% of ₹ 6 = ₹ 1.50, so \(EOQ = \sqrt{\frac{2 \times 3200 \times 150}{1.5}} = \sqrt{6{,}40{,}000} = 800\) units.
The EOQ is 800 units, not 700 units, so Statement II is also incorrect.
Hence, the answer is Both statements are incorrect.
Similar Questions
The formula \(\frac{Q}{2}\) is used to compute the :
Match the items of List – I with the items of List – II :
List – I List – II (a) Trade credit and other payables that arise in the firm’s day today operations (i) Maturity Financing (b) Financing and asset needs over time (ii) Factoring (c) A tool for accelerating the collection from the customers (iii) Spontaneous financing (d) Seeking financial service to finance on its debtors’ balances (iv) Lockbox system Codes :
(a) (b) (c) (d)
Insufficient working capital in any enterprise may also result into
I. Failure to adapt to changes
II. Overcapitalisation
III. Reduced availability of trade and cash discounts
IV. Reduced volume of production and sales
Codes :
Which one of the following emphasizes the qualitative aspects of working capital management ?
Cash Flow Management involves :
I. Lock-box system
II. Marketable securities
III. Playing the float
IV. Concentration Bank Account
Codes :
Concentration Banking is a method of :
Important Questions from Working Capital
Which of the following physical capitals is a working capital for a factory?
As per which one of the following approaches, a firm finances a part of its permanent working capital with short term financing?
Which of the following is not the problem of human capital formation?
Which one of the following will have a net change in the amount of working capital of a company?
_______ refers to the funds, which an organisation must possess to finance its day to day operations.
