Final answer:
Fixed assets do not vary directly with sales because they are not easily changeable in the short term and are associated with fixed costs. In the long run, fixed assets can be increased with planning and investment, but this is not an immediate response to sales changes. Diminishing marginal returns may also affect costs when trying to increase output without adjusting fixed assets.
Step-by-step explanation:
The statement that fixed assets vary directly with sales when companies are operating at less than full capacity is generally false. Fixed assets, such as buildings, machinery, and equipment, are called 'fixed' because they cannot easily be changed in the short term and are not directly variable with sales. They define a firm's maximum output capacity and are associated with fixed costs, which do not change with the level of output in the short run.
In the long run, however, with sufficient planning and investment, fixed assets can become variable to a certain extent. For example, a firm can invest in more capital, allowing it to hire more workers and potentially produce more, but this process is not immediate and does not occur simply as a direct response to a temporary change in sales. Variable inputs, such as labor or raw materials, are more likely to vary directly with sales.
For instance, consider a firm that is currently utilizing one building for production. If sales increase and the firm is operating under full capacity, it may require more materials or temporary labor to meet the demand but would not immediately purchase another building. The concept of diminishing marginal returns also comes into play if the firm tries to increase output without increasing fixed inputs, potentially leading to increased marginal costs due to factors like overworked equipment or inefficient use of space.