When deciding whether to invest in more factories or improve capacity at the existing one, which approach is prudent?

• A. Assess demand, supply, and profitability before expanding; expanding existing capacity may be less risky than opening new factories too quickly.
• B. Immediately build multiple new factories without market data.
• C. Close the existing facility and rely on third-party contractors.
• D. Ignore market signals and focus on aesthetics of plant design.

Answer: (A)

This question tests how to approach capacity decisions with real market signals rather than guesses. The prudent path is to base expansion on demand, supply constraints, and profitability. By forecasting demand, you avoid overbuilding or underutilizing plants. Checking supply ensures you can actually deliver what you plan to produce and identifies any bottlenecks. Analyzing profitability shows whether the expected scale of operations will earn an adequate return after costs. When you combine these elements, you reduce the risk of tying up capital in capacity that isn’t needed or won’t be economical.

Expanding the existing facility is often safer because it leverages current processes, workforce, and location, typically with lower upfront costs and shorter lead times than opening a new factory. It also makes it easier to maintain quality and reliability while scaling gradually as demand materializes.

Building multiple new factories without market data exposes you to high risk and large capital outlays that may not pay off if demand falls short. Relying on third-party contractors by closing the existing facility reduces control over operations, timing, and quality, and can introduce supply disruption. Focusing on aesthetics instead of market signals ignores real capacity needs and efficiency, making it a poor basis for expansion decisions.