The prices of raw materials and the wages of workers have gone up. Mohan Ltd. now needs more funds just to keep its production and sales at the same volume.
Which factor affecting the working capital requirement is shown here?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Inflation
Option (1) Inflation — Correct. When prices rise, the same raw materials and labour cost more. So larger amounts are needed even to keep the same volume of production and sales. The working capital need goes up.
Option (2) Business cycle — Incorrect. This is about the phases of trade. In a boom, sales and production grow and need more working capital; in a depression they shrink. Mohan Ltd.’s volume has not changed.
Option (3) Growth prospects — Incorrect. A firm with high growth potential needs more working capital to meet higher production and sales targets. Mohan Ltd. is not planning to grow.
Option (4) Scale of operations — Incorrect. A firm working on a higher scale keeps more inventory and debtors, so it needs more working capital. Mohan Ltd.’s scale is the same as before.
NCERT (2026-27 Edition): “2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale. “10. Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require larger amount of working capital so that it is able to meet higher production and sales target whenever required.” “12. Inflation: With rising prices, larger amounts are required even to maintain a constant volume of production and sales. …” |