Given below are two statements:
Assertion (A): An organisation operating at a higher scale of operations generally requires a larger amount of working capital than one operating at a lower scale.
Reason (R): An organisation operating at a higher scale needs a bigger plant and more space than a small organisation.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): An organisation operating at a higher scale of operations generally requires a larger amount of working capital than one operating at a lower scale. — True. A firm at a higher scale holds more stock and sells more on credit. So it needs a larger amount of working capital.
Reason (R): An organisation operating at a higher scale needs a bigger plant and more space than a small organisation. — True. A larger organisation needs a bigger plant and more space, so it invests more in fixed assets.
Why R does not explain A?
R speaks of plant and space. These are fixed assets, so R explains a higher fixed capital. Working capital is money held in current assets, and a bigger plant does not add to them. So R does not bring about A.
The correct reason for A is that a firm at a higher scale needs a high quantum of inventory and debtors. These are current assets, so its working capital requirement rises.
NCERT (2026-27 Edition): “Factors affecting the Requirement of Fixed Capital … 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.” “Factors Affecting the Working Capital Requirements … 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.” |