Question

Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increaseof the additional funds needed (AFN)?Answer A. A sharp increase in its forecasted sales.B. A switch to a just-in-time inventory system and outsourcing production.C. The company reduces its dividend payout ratio.D. The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.E. The company discovers that it has excess capacity in its fixed assets.

Answer 1

Answer: (E)

Step-by-step explanation:

All the listed factors have a tendency to increase additional funds needed but *all other factors being equal*, only one is MOST likely to lead to an increase in additional funds needed.

- A sharp increase in JCC's forecasted sales should be offset or taken care of by the profit made from the already increasing sales (all else being equal)

- A switch to a just-in-time inventory system and outsourcing production can boost the company is performance but is not a compulsory step for the company to take. This factor is hence, not so likely to lead to an increase in additional funds needed.

- The most likely causal factor of an increase in additional funds needed is (E)

If along the line or during the year, Jefferson City Computers discovers that it has excess capacity in its fixed assets, it will need more additional funds. To maximize production, performance, sales, and profit, there should be maximum utility of fixed assets. Additional funds will be needed to purchase more variable assets that will be used in combination with the unutilized fixed assets.