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:

Variable Cost

Expenses that vary directly with the level of production or sales volume, such as raw materials and labor.

Transfer Price

The price at which goods and services are traded between departments or subsidiaries within the same organization.

Variable Cost

Costs that vary directly with the level of production or sales volume, such as materials and labor, in contrast to fixed costs which remain constant regardless of production level.

Transfer Price

The price charged for goods or services transferred between departments or subsidiaries within the same company.