A firm is capital intensive if:

A business process or an industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor that is required.

 

Some industries commonly thought of as capital intensive include oil production and refining, telecommunications and transports such as railways and airlines.

 

In all of the above industries, a large financial commitment is required just to get the first unit of good or service produced. Once the upfront investments are made, there may be economies of scale with regards to ongoing expenses and sales growth. But the initial hurdle to get into the business tends to keep the list of competitors small, creating high barriers to entry.

 

Companies in capital-intensive industries are thus often marked by high levels of depreciation and fixed assets on the balance sheet.

c) it has a high proportion of fixed costs in its cost structure, rather than variable costs.

Sounds safe.

 

Option C.

Capital Intensive means that company is mostly relying on its fixed assets.

c) it has a high proportion of fixed costs in its cost structure, rather than variable costs.

 

Mechanization is the priority to cut labour costs mainly,

I agree with what others has said. For example take a petroleum company. The initial cost of exploration, drilling machine installation, experts fee etc are in millions and billions dollar. once the oil is found and production started it will only be production, labor and transporting cost they might face. Additional investment might be needed to further strength their economies of scale. When all these operating costs are compared with the capital cost it will become insignificant.

That is why capital intensive firms are required to have a higher gross profit margin. This margin should cover the fixed costs and bring a profit.

Since the companies initial investment cost is bigger than any other investments only few players are participated in the market and the market is highly monopolized by these players. This big amount of investment is also a barrier to entry in the market. For these reason price are monopolized.

 

 

The right answer is ..............

 

c) it has a high proportion of fixed costs in its cost structure, rather than variable costs.

A firm is capital intensive if it has a high proportion of fixed costs in its cost structure.

Industry requiring large sums of investment in purchase, maintenance, and amortization of capital equipment, such as automotive, petroleum, and steel industry. Capital intensive industries need a high volume of production and a high margin of profit (as well as low interest rates) to be able to provide adequate returns on investment. See also labor intensive.