If capacity is under-utilised, what is a likely impact on costs?

• A. Under-utilisation lowers fixed costs per unit due to more efficient use.
• B. Under-utilisation raises average costs because fixed costs are spread over too little output.
• C. Under-utilisation has no impact on costs.
• D. Under-utilisation increases throughput.

Answer: (B)

When capacity is under-utilised, total fixed costs stay the same but you’re producing fewer units. Fixed costs don’t vary with output in the short run, so spreading those constant costs over a smaller number of units pushes the cost per unit higher. That’s why the impact is an increase in average costs per unit.

The other ideas don’t fit: spending less on fixed costs per unit would require more output or greater efficiency, which isn’t the case with idle capacity. Saying there’s no impact ignores how fixed costs are allocated, and saying throughput increases contradicts the fact that idle capacity means you’re producing less, not more.