Consider the following statements about the factors affecting the requirement of fixed capital:
(A) A firm that diversifies its operations into a new line of manufacturing needs more fixed capital.
(B) Higher growth of an organisation generally requires lower investment in fixed assets.
(C) A larger organisation operating at a higher scale needs a bigger plant and more space than a small one.
(D) Firms jointly set up a facility when the scale of operations of each of them is large enough to make full use of it.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) and (C) only
(A) A firm that diversifies its operations into a new line of manufacturing needs more fixed capital. — Correct. With diversification, fixed capital needs rise. A textile firm starting a cement plant must buy a new plant.
(B) Higher growth of an organisation generally requires lower investment in fixed assets. — Incorrect. The direction is reversed. Higher growth generally needs higher investment in fixed assets, as the firm builds capacity for the expected demand.
(C) A larger organisation operating at a higher scale needs a bigger plant and more space than a small one. — Correct. This is scale of operations. A bigger plant and more space mean a higher investment in fixed assets.
(D) Firms jointly set up a facility when the scale of operations of each of them is large enough to make full use of it. — Incorrect. The condition is reversed. Firms share a facility when the scale of each one is not sufficient to make full use of it. This collaboration cuts each firm's investment.
NCERT (2026-27 Edition): “2. 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.” “5. Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets. …” “6. Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant. Obviously, its investment in fixed capital will increase.” “8. Level of Collaboration: At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. This is feasible if the scale of operations of each one of them is not sufficient to make full use of the facility. …” |