Why might expanding output not automatically improve profitability?

• A. It always increases profits if capacity exists.
• B. It only improves profitability if cost control and selling prices cover the additional costs and demand exists.
• C. It guarantees economies of scale.
• D. It has no impact on profitability if fixed costs rise.

Answer: (B)

Expanding output won’t automatically boost profits because the extra units bring extra costs, and you must also be able to sell them at a price that covers those costs. The key idea is to look at the marginal contribution: for each additional unit, the selling price minus the incremental cost should be positive, and there must be enough demand to sell the extra output. If the additional costs (materials, labor, any new fixed costs from expansion) aren’t fully covered by the higher revenue, profitability won’t improve. If demand is weak, even a favorable unit margin won’t translate into higher profits because you can’t sell the extra output.

That’s why the best answer emphasizes that profitability rises only when cost control and selling prices cover the extra costs and there is demand to absorb the additional production. It’s not guaranteed that expanding will generate economies of scale, and rising fixed costs don’t automatically erase profitability—what matters is whether the incremental volume makes sense financially.