Question

How would you classify the following - as sunk capital or floating capital? Give reasons.

Raw material

Answer 1

Raw material is classified as floating capital.

Reason:

• Floating capital, also known as non-specialised capital, refers to capital that can be used for several purposes or can be transferred from one use to another without losing its utility.
• Raw materials are used up once in the production process and can be easily replaced or transferred to different production uses.
• Unlike sunk capital (specialised capital) which is used for a single specific purpose and cannot be easily repurposed e.g., a printing machine used only for printing, raw materials are not specialised and can be used flexibly in production.
• Therefore, raw materials fall under floating capital because their use is not restricted to a particular production purpose and they are consumed and replaced regularly in the production cycle.