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Question

Comment on the fixed capital requirements of the following industries giving suitable reasons.

(i) A construction firm, which has provisions to lease earth moving equipment and bulldozers.

(ii) The electronic goods manufacturer who has entered into collaboration with a giant firm in South East Asia.

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Solution

(i) The construction firm is a service company which provides earthmoving equipment and bulldozers on a lease. There is no fixed storage area required as they can be a park in an open, at a designated place. There is no fixed storage area required as they can be a park in an open, at a designated place. The construction firm's fixed capital requirements are only for the office space, equipment bulldozers, and land or designated place where the equipment can be parked. The earthmoving equipments and bulldozers will be leased to other construction firms for constructing residential or commercial real estate and roads. There is no scope for diversification and technology up gradation. Fixed capital will be required only if the firm purchases more units of earthmoving equipment and bulldozers and land to park them. The firm will experience high growth prospects, thus requiring fixed capital because the demand for real estate is high growth prospects, thus requiring fixed capital also high. If the company can rent office and land then would require fixed capital for the equipment and bulldozers. The overall fixed capital requirement will be high because the earthmoving equipments and bulldozers are very large, bulky and costly purchases.

(ii) The electronic goods manufacturer's fixed capital requirements will be for land, building/office, electronic hardware, machinery, fixtures, vehicles, etc. The electronic goods will be highly capital intensive and would require more fixed capital. The electronic industry is subject to technology upgradation and will accordingly require more fixed capital. The scale of operations will be high and will require more fixed capital. This business also has high growth prospects and diversified their businesses by expanding in different markets or customers domestically or abroad. The electronic goods manufacturer, however, has entered into a collaboration with a foreign firms and thus, the fixed capital requirement for suitable foreign countries will be less. Overall fixed capital requirement will be high.


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