Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Question

Quizplus · Accepted Answer

Practical capacity represents the maximum amount of output that a company can produce under normal operating conditions, taking into account any expected interruptions such as maintenance or downtime. By using practical capacity as the denominator level, companies are not accounting for the actual demand for their product, but rather the potential supply. This means that the cost of capacity is set based on the cost of supplying the capacity, regardless of whether that capacity is fully utilized or not. Therefore, the statement is true.

Using Practical Capacity as the Denominator Level Sets the Cost