Question

which of the following statements is true with regard to best operating level? group of answer choices in underutilization, average unit cost of output increases in overutilization, average unit cost of output increases best operating level is the minimum average unit cost of output best operating level is the denominator of capacity utilization calculations all of these answers are true

Answer 1

When it comes to the best operating level, all of the above are correct.

The best operating level is where all resources are being utilized effectively and marginal revenue is equal to marginal cost. If there resources are not being utilized effectively, the following will happen:

• Average unit cost increases as a result of underutilization - the units available are not being utilized effectively which means that the company is incurring more cost than it should per good produced.

• Average unit cost increases as a result of overutilization - units are being overused which is forcing the company to incur expenses to replace the overused resources.

At the best operating level however, average cost will be at a minimum because the goods are being used effectively and efficiently.

In conclusion, it is best for a business when they operate at an efficient operating level.

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