Assume that a firm did not operate at full capacity in the current year. The firm should increase its plant and equipment only if:
A) its variable cost of goods sold ratio changes in the next year with an increase in operations.
B) the additional sales forecasted in the next year exceed the unused capacity of the existing assets.
C) the internally generated funds are in surplus to support the forecasted increase in sales.
D) the addition of fixed assets in large, discrete units results in economies of scale.
E) fixed operating costs are not recovered by the revenue from each unit sold by the firm.

Question

Quizplus · Accepted Answer

The firm should increase its plant and equipment only if the additional sales forecasted in the next year exceed the unused capacity of the existing assets. This ensures that the investment in plant and equipment will result in increased sales and revenue. If there is unused capacity, it is an indication that the firm does not need to increase its assets to meet the sales demand. The other options may be considered when making investment decisions, but they are not directly relevant to whether or not the firm should increase its plant and equipment.

Assume That a Firm Did Not Operate at Full Capacity