Which of the following statements is CORRECT?
A) When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
B) Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
C) For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
D) There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.
E) When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner.

Question

Quizplus · Accepted Answer

Firms whose fixed assets are "lumpy" (i.e., can only be added in large, discrete units as the company grows) often have excess capacity. This excess capacity should be taken into account in financial forecasting in order to accurately predict future financing needs. The other statements are either incorrect or incomplete.

Which of the Following Statements Is CORRECT