Under production cycle as a factor affecting the working capital requirement, the duration and length of the production cycle affects the amount of funds required for __________.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → raw materials and expenses
Option (1) debtors and bills receivable — Incorrect. Debtors depend on the credit allowed to customers. A liberal credit policy raises debtors, whatever the length of production.
Option (2) plant and machinery — Incorrect. Plant and machinery are fixed assets. Their need depends on fixed capital factors, such as the choice of technique.
Option (3) raw materials and expenses — Correct. The production cycle is the time between receiving raw material and turning it into finished goods. During this time the firm keeps paying for materials and expenses. A longer cycle locks up these funds for longer, so the working capital needed is higher.
Option (4) cash and marketable securities — Incorrect. These are the most liquid current assets, kept to meet payments as they fall due. A longer cycle locks up funds in materials and in the expenses of making goods.
NCERT (2026-27 Edition): “5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.” “6. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.” |