If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the _____.
A)total cost of producing the product
B)market value of the product
C)market value less the usual markup on the product
D)total variable cost of producing the product

Question

Quizplus · Accepted Answer

When a company has excess capacity, the most it would pay for buying a product that it currently makes is the total variable cost of producing the product. This is because the fixed costs are already incurred whether or not the product is made, so they should not factor into the decision of the maximum price to pay for buying the product externally.

If a Company Has Excess Capacity, the Most It Would