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Annette [7]
3 years ago
6

A process has low fixed costs and high variable costs. It is currently capacity-constrained. Will the impact of an efficiency im

provement be small or large?
Business
1 answer:
Lubov Fominskaja [6]3 years ago
3 0

Answer:

Small

Explanation:

Fixed costs are the costs that do not change when output level changes, while variable costs are costs that change as output quantity changes.

When a production process is capacity constrained, it implies that there is a factor that does not allow it to produce more output. Examples of such factors are minor bottlenecks, constrained designs and resources, and others.

A process is said to be efficient when it can avoid waste of resources in producing desired output.

Efficiency improvement therefore occurs when more output can be produced with less resources.

In the question, given that the process is currently capacity-constrained, efficiency improvement will result in producing more output at higher costs because of high variable costs despite that the process has low fixed costs.

As a result, the impact of an efficiency improvement will be small because producing more output will result in incurring higher cost due to high variable costs that change as quantity of output changes. That is, the impact of efficiency improvement will be small because high variable costs with low fixed cost will result in higher production cost.

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Future value will be larger with smaller compounding period; $373.4 more would be earned with shorter compounding period.

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Given:

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Value of investment at the end of 25 years = 14,500\times(1+0.04)^{25}

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Future value if semi-compounded annually is $39,028.03

As such, future value is larger if compounding period was 6 months.

They would have earned $373.40 more that is (39,028.03 - 38,654.63), with shorter period.

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