A furniture maker gets its wood from a supplier next door, who delivers freely and without a break whenever asked. So the maker keeps only a small stock of wood. Which factor affecting the working capital requirement is at work here?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Availability of raw material
Option (1) Seasonal factors — Incorrect. More working capital is needed in the peak season and less in the lean season. Nothing in the case changes with the season.
Option (2) Availability of raw material — Correct. When raw material is available freely and continuously, a lower stock is enough. The supplier next door delivers whenever asked, so the maker keeps little wood and needs less working capital.
Option (3) Production cycle — Incorrect. The production cycle is the time from receipt of raw material to finished goods. A longer cycle needs more working capital. The case says nothing about how long the furniture takes to make.
Option (4) Credit availed from suppliers — Incorrect. This is the credit a firm gets from its suppliers, which lets it pay later. The case is about how readily the wood is delivered, and says nothing about when it is paid for.
NCERT (2026-27 Edition): “9. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.” |