Question

If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.

a. True
b. False

Answer 1

Answer; True

Explanation;

When a company has excess capacity, it means that potentially it could produce more than it is producing at the moment. As this potential already takes into account the fixed costs, this means that given the fixed costs it currently has, more goods could be produced on those same fixed costs and they wouldn't increase.

Increasing production level would therefore only increase variable costs which rise whenever production rises as they are directly related to the production of goods.