F.Marston, Inc.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 increase of the additional funds needed (AFN)?
A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that offers a longer credit period (with all other terms held equal).
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.

Question

Quizplus · Accepted Answer

A sharp increase in forecasted sales will require more assets to support the increased sales volume, thereby leading to an increase in AFN. The other options are likely to decrease AFN. A just-in-time inventory system and outsourcing production decrease inventory and fixed assets, reducing AFN. A reduction in dividend payout ratio decreases the need for financing, reducing AFN. Switching to a supplier that offers a longer credit period increases accounts payable, which reduces AFN. Discovering excess capacity in fixed assets reduces the need for additional fixed asset investments, reducing AFN.

FMarston, Inc