Question

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Question 64 (Mandatory) (1 point) Suppose a firm was planning to greatly reduce its raw materials inventory next year by introducing just-in-time inventory control procedures. Assuming no other changes to the firm's operations, what would this do to AFN? O The AFN would decrease. O It would not change the AFN. O The AFN would increase. It cannot be determined without knowing the impact on the profit margin.

Answer 1

Answer 64:

Here, Firm is planning to greatly reduce its raw material inventory next year by introducing a Just-in-Time inventory control procedure.

Just-in-Time Inventory System:

In the Just-in-Time Inventory system inventory is received from the supplier as and when required by the firm under an agreement i.e. firm does not maintain inventory. So, Inventory is maintained at the minimum/zero levels. Because of this, working capital blocked for maintaining inventory is no longer required which reduces the requirement of Additional Funds.

So, Correct Answer is the first one: "The AFN would decrease" since Just-in-Time Inventory system reduces the requirement of working capital needed for maintaining the stock of raw materials.

The second one "It would not change AFN" is incorrect as Just-in-Time Inventory System clearly reduces the requirement of additional funds.

The Third one "The AFN would increase" is also incorrect as Just-in-Time Inventory System does not require maintaining higher stock levels of raw materials.

The Forth one "It cannot be determined without knowing the impact on profit margin" is irrelevant under this discussion as Additional Fund Requirements has nothing to do with Profit Margin.