If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:
A)total variable cost of producing the product
B)market value less the usual markup on the product
C)total cost of producing the product
D)market value of the product

Question

Quizplus · Accepted Answer

If a company has excess capacity, it means that it can produce more of the product without incurring any additional fixed costs. Therefore, the most it would pay for buying a product that it currently makes would be the total variable cost of producing the product, which is the minimum cost to produce one additional unit of the product. This would help the company avoid incurring any extra costs and maximize its profits. Choice B would not make sense as the company would not pay the market value less the usual markup on the product since it could produce the product at a lower cost. Choice C would involve the fixed costs as well, which the company could avoid by producing the product in-house. Choice D would also not make sense as the market value of the product would include a profit margin that the company would not need to pay if it produced the product itself.

If a Company Has Excess Capacity, the Most It Would