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 increase of the additional funds needed (AFN)?

a. The company discovers that it has excess capacity in its fixed assets.
b. The company reduces its dividend payout ratio.
c. 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.
d. A sharp reduction in its forecasted sales.
e. A sharp increase in its forecasted sales.

The correct answer is e. A sharp increase in its forecasted sales.

Explanation:

Generally above-forecast behavior within sales means a considerable increase in your sales revenue, which means a directly proportional movement considering the nature of sales maximization. When this situation occurs, it is important to carry out a review of the model used, since other variables that may affect the AFN estimate for a future period may be being underestimated. A forecast adjustment is always an excellent option to avoid making measurements that are out of expectations, leading to a false belief that the market behaves in a volatile manner.

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