A company is proposing to expand its productive capacity by a significant amount. What is the decision rule that should be applied by the directors in deciding whether or not to accept the expansion proposal? Accept the project if:
A) Its incremental revenue exceeds incremental costs
B) Incremental revenue exceeds incremental fixed costs
C) Incremental fixed costs do not exceed variable costs
D) Incremental fixed costs plus incremental variable costs exceed incremental revenue

Question

Quizplus · Accepted Answer

The decision rule that should be applied is based on whether the incremental revenue from the expansion proposal exceeds the incremental costs. This indicates that the expansion will generate more revenue than the additional costs incurred, resulting in a net gain for the company. Option A is the best choice as it directly articulates this decision rule. Option B would be too restrictive as it only considers fixed costs, while option C is not applicable since it does not consider the revenue generated. Option D is incorrect as it indicates that the costs exceed the revenue, which would result in a net loss for the company. Thus, option A is the best choice for the directors in deciding whether or not to accept the expansion proposal.

A Company Is Proposing to Expand Its Productive Capacity by a Significant