P Ltd. and Q Ltd. are of the same size and make the same kind of shoe…

P Ltd. and Q Ltd. are of the same size and make the same kind of shoes. P Ltd. uses automatic machines for most of its work, while Q Ltd. relies mainly on manual workers. P Ltd. needs much more fixed capital than Q Ltd.

Which factor affecting the requirement of fixed capital explains this difference?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Choice of technique

Option (1) Technology upgradation — Incorrect. This factor applies where assets become obsolete sooner and are replaced faster, as with computers. Nothing in the case is about replacing assets.

Option (2) Scale of operations — Incorrect. A larger firm needs a bigger plant and more space. But P Ltd. and Q Ltd. are of the same size.

Option (3) Choice of technique — Correct. A firm may be capital intensive or labour intensive. P Ltd. relies on automatic machines, so it is capital intensive and needs more plant and machinery. Q Ltd. relies on manual workers, so it is labour intensive and needs less fixed capital.

Option (4) Nature of business — Incorrect. This compares types of business, such as a trading concern and a manufacturer. Both firms make the same kind of shoes.

NCERT (2026-27 Edition): “Factors affecting the Requirement of Fixed Capital 1. 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.
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.
3. Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower.”