Question

‘Koka Manufacturing Ltd.’ is a large scale manufacturer in the electronics industry. In this industry assets are prone to obsolescence and their replacement becomes due faster with change in technology. The company is constantly under pressure to upgrade its machinery and equipment as it would help company to stay competitive, improve its product quality and reduce production costs. So instead of purchasing the machinery, company decides to lease the required machinery, giving it flexibility to upgrade equipment at the end of lease term. This helps company to maintain operational efficiency, technological competitiveness and financial flexibility.

Identify and explain four factors that would affect the fixed capital requirements of ‘Koka Manufacturing Ltd.’.

Hint:

The case gives clues for four factors: manufacturing nature, large scale, fast technology change and the choice to lease machinery. Explain how each one raises or lowers the fixed capital need.

Answer 1

Step 1: Understand the question:
Fixed capital is the money invested in long-term assets such as land, building and machinery.
The case describes Koka Manufacturing Ltd., an electronics manufacturer that prefers to lease machinery.
We must pick four factors from the case and explain how each one affects its fixed capital need.

Step 2: Factor 1: Nature of business:
The case says Koka is a manufacturer. A manufacturing company needs plant, machinery and buildings, so it needs more fixed capital.
A trading or service firm needs far less fixed capital.
So the manufacturing nature of Koka raises its fixed capital requirement.

Step 3: Factor 2: Scale of operations:
The case calls Koka a large scale manufacturer.
A large business needs bigger plant and more equipment, so its fixed capital need is higher than that of a small firm.
So its large scale pushes the requirement up.

Step 4: Factor 3: Technology upgradation:
The case says that in this industry assets become obsolete fast and replacement falls due sooner because of changing technology.
Such assets need to be replaced often, so more money is locked in fixed assets.
This is a strong reason for a high fixed capital need.

Step 5: Factor 4: Financing alternative:
The case says Koka decides to lease machinery instead of buying it.
Leasing means the company gets the use of the asset without paying its full price at the start.
So Koka needs less fixed capital than it would if it purchased the machinery.

Step 6: Link the factors together:
Nature of business, scale of operations and technology upgradation increase the need for fixed capital.
The leasing choice reduces it. Koka can also upgrade equipment at the end of the lease term.
Together they decide how much fixed capital the company must arrange.

Final Answer:
The four factors are nature of business, scale of operations, technology upgradation and financing alternative (leasing). The first three raise the fixed capital need and leasing lowers it.