Final answer:
Production-volume-variance might not accurately reflect the economic cost of unused capacity because it doesn't always capture changes in capacity utilization and may not assess opportunity costs associated with not reaching economies of scale.
Step-by-step explanation:
Production-volume-variance may not accurately reflect changes in capacity utilization. This statement acknowledges that the production-volume-variance, which is a measure used in cost accounting, might not quite capture the economic implications of having unused capacity. In understanding this, it's essential to consider the relationship between fixed costs, variable costs, and economies of scale.
Fixed costs do not change with the level of production and are considered sunk costs, having no direct impact on decisions for future production levels. Variable costs, however, do change with the level of production and often show diminishing marginal returns, with the cost of producing additional units increasing after certain points. Economies of scale suggest that as a firm increases production, its cost per unit decreases. Therefore, if a firm is not operating at its optimal scale, the production-volume-variance may show a cost for not utilizing full capacity, but it may not reflect the true economic cost of this underutilization because the firm's cost per unit could be inaccurately estimated if it isn't operating at the most efficient level.
Furthermore, due to the nature of these costs and how they behave, the production-volume-variance, which typically factors in fixed costs, may not properly assess the opportunity costs associated with not producing more units if the firm is not at the capacity that achieves economies of scale. Hence, the firm needs to experiment with production levels to find the optimal balance between production quantity, marginal revenue, and marginal cost to maximize profits.