Higher contribution margins lead firms to invest in higher capacity, even with low capacity utilization expectations.

Question

Quizplus · Accepted Answer

Higher contribution margins mean that each unit produced contributes more towards covering fixed costs and generating profit. This gives firms greater financial flexibility and may encourage them to invest in higher capacity even if they don't expect immediate utilization, as long as they believe the investment will pay off in the long run.

Higher Contribution Margins Lead Firms to Invest in Higher Capacity