Management Has Decided to Add Capacity Incrementally in Smaller Chunks

question 107

Multiple Choice

Management has decided to add capacity incrementally in smaller chunks as needed, rather than purchasing one large facility. This decision ____________________.

• A) is very risky
• B) will result in low initial costs
• C) will ultimately result in lower costs per unit if demand increases rapidly
• D) positions the company to be well prepared for high demand in the future
• E) can lead to a large amount of excess capacity

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Definitions:

Portfolio Standard Deviation

A measure of the dispersion of returns from a portfolio, indicating the portfolio's risk.

Cyclical Stock

Shares of companies whose earnings and stock price are heavily influenced by the ups and downs of the economy at large.

Countercyclical Stock

A type of stock whose performance is inversely related to the overall state of the economy; it tends to perform well during economic downturns.

Expected Return

Expected Return is the anticipated amount of profit or loss an investment is likely to generate, accounting for both the risk of the investment and the time value of money.