Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:
A) scenario analysis.
B) sensitivity analysis.
C) an operating leverage application.
D) soft rationing.
E) hard rationing.

Question

Quizplus · Accepted Answer

Soft rationing occurs when a company limits its investment in new projects despite having the financial capacity to invest more. In this case, Uptown Promotions has chosen to limit its spending to $10 million for new projects next year, even though it could afford additional investments, which is a classic example of soft rationing.

Uptown Promotions Has Three Divisions