Question

Can firms operate with excess capacity? If a firm is operating with excess capacity, what implications does this have for the external finance they need when they are expanding?

Answer 1

Answer:

No, firms cannot operate with excess capacity on the grounds that there are not in every case enough demand to get together with their complete production capacity and when they are operating under the capacity, it will imply that they will have a greater requirement for external finance when there will be extra demand for them, so it might be superior for them to not generally drew in into higher fixed cost as they may be drawing in into increased fixed cost when there will be extra demand and they will be attempting to keep their expense as much as possible as it will be over all prompting decrease on fixed cost of the organization and by and large expanding of the cost-effectiveness of the organization.

When there is a requirement for exorbitant production by the firm, it will imply that they should produce external finance for them as they are extending themselves so as to manufacture all the more so it will be prompting with additional cost for them and they will be attempting to recoup those expense out of the customer so these organizations will likewise have an adaptable operative structure in which they can grow according to the need and request of the customer and they can diminish their fixed expense since they are not generally utilized at full capacity, so it will be prompting external finance at proper occasions when there will be overabundance of demand, hence these organizations are profoundly adaptable in nature and they will have a higher financing cost yet lesser fixed cost.

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