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Questions
Answer the following question.
Explain briefly any four factors affecting the fixed capital requirements of an organisation.
Answer the following question.
Explain briefly any four factors that affect the fixed capital requirements of a company.
Solution
Factors affecting the fixed capital requirements of an organisation:
- A scale of operations: A company which is operating in a large-scale of operations will require larger fixed assets in the form of plants, land, and building.
Larger organisation ⇒ Higher investment in fixed assets
Small organisation ⇒ Lower investment in fixed assets - Choice of technique: A company may use labour-intensive or capital-intensive techniques. A company using capital-intensive techniques will require larger fixed assets, whereas a company using the labour-intensive technique will require less fixed assets.
Capital-intensive organisation ⇒ Higher investment in fixed assets
Labor-intensive organisation ⇒ Lower investment in fixed assets - Technology up-gradation: Due to changes in technology or it becoming obsolete over time, companies require a large amount of investment in fixed capital. For example, certain machinery becomes obsolete very soon compared to other assets such as furniture. Therefore, a larger fixed capital is required for upgradation.
Faster up-gradation ⇒ Higher investment in fixed assets
Slower up-gradation ⇒ Lower investment in fixed assets - Financing alternatives: If leasing facilities are available without any lengthy procedures in the financial market, then the fixed capital requirements will be less.
Non-availability of financing alternatives⇒ More fixed capital
Availability of financing alternatives ⇒ Less fixed capital - Growth prospects: a Higher growth of an organisation requires a higher investment in fixed assets. When growth is expected, a company usually chooses to create a higher capacity to meet anticipated higher demand. This further requires a larger investment in capital.
- Type of business: The type of business has a direct bearing upon the fixed capital requirements of the firm. A trading concern needs lower investment in fixed assets as compared to a manufacturing business having a large operating cycle.
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Bright Bulbs Pvt. Ltd., is manufacturing good quality LED bulbs and catering to the local market. The current production of the company is 1,000 bulbs a day. Anita, the marketing manager of the company, surveyed the market and decided to supply the bulbs to five-star-hotels also. She anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced. Which factor affected the fixed capital requirements of the company?
Match the factors affecting fixed capital requirements given in Column - I with their explanations given in Column - II:
| Column - I | Column - II | ||
| (A) | Nature of Business | (i) | A trading organisation needs lower investments in fixed assets as compared to a manufacturing organisation. |
| (B) | Technology upgradation | (iii) | A textile manufacturing company is installing a cement manufacturing plant and thus its investments in fixed assets is increasing. |
| (C) | Diversification | (iii) | A capital-intensive organisation requires higher investments in fixed assets as compared to labour- intensive organisation. |
| (D) | Choice of Technique | (iv) | Mobile phones became obsolete faster and are replaced much sooner than furniture or many other assets. Hence, these type of businesses require more fixed capital. |
