If a firm currently operates at less than full capacity, it must increase existing plant and equipment only if:
A)its total variable operating costs increase with an increase in sales.
B)the unused capacity of its existing assets is not sufficient to support a forecasted increase in sales.
C)the internally generated funds exceed the amount required to support the forecasted increase in sales.
D)the addition of fixed assets in large, discrete units results in economies of scale that increase operating costs.
E)fixed operating costs tend to decrease with higher sales.

Question

Quizplus · Accepted Answer

If the firm is already operating at less than full capacity, it has unused capacity in its existing assets. Therefore, it should only increase existing plant and equipment if the unused capacity of its existing assets is not sufficient to support a forecasted increase in sales. This is because the firm would want to utilize its existing assets to their fullest potential before investing in new plant and equipment. Option A, C, D, and E do not accurately reflect the requirement for increasing existing plant and equipment when operating at less than full capacity.

If a Firm Currently Operates at Less Than Full Capacity