Suggest in which of the following cases, the fixed capital requirement of company will be more?
(A) A firm buying from small retailers and selling it into the market
(B) Leasing a factory premises instead of buying it
(C) A textile company is diversifying into a cement manufacturing
(D) A Micro Service Enterprise
(E) A company manufacturing two wheelers and four wheelers
Choose the correct answer from the options given below:
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This question was previously asked in
Shift 13/06/2023 12:00 PM - 2:00 PM
Correct Answer
Detailed Explanation
Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery, etc
Scale of Operations: A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.
Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increase
Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of businesess
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