Alex Ltd has recently automated production of its famous Staffordshire Oatcakes and this has led to some redundancies amongst employees that are paid on an hourly basis (ie variable labour).
The company borrowed heavily to finance the purchase of the machinery needed.
The effects of these changes on the company’s financial risk are that?
Select ONE answer:
- Both changes (machinery and borrowing) increase the company’s financial risk
- Automation increases financial risk, borrowing decreases it
- Automation decreases financial risk, borrowing increases it
- Both changes decrease financial risk
Show your workings to arrive at your answer, and explain and justify your reasons:
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 1
- Correct == > Both changes (machinery and borrowing) increase Alex Ltd’s liquidity risk, a type of financial risk, as they increase the amounts (fixed overheads and interest) that must be paid however much revenue is achieved. They both mean that Alex Ltd is more exposed if there is a downturn in demand for its products.
- Not correct
- Not correct
- Not correct
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