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IMANET Exam CMA Topic 4 Question 4 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 4
Topic #: 4
[All Certified Management Accountant Questions]

When demand uncertainty is low, firms tend to adopt a strategy of preemptive expansion. The conditions for successful preemption expansion include which of the following?

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Suggested Answer: C

Economics of scale should be large in relation to demand, or the learning-curve effect should give an initial large investor a permanent cost advantage. For example, the preemptive firm may be able to secure too much of the market to allow a subsequent firm to invest at the efficient scale. That is, the residual demand available to be met by the later firm is less than the efficient scale of production. The later firm therefore must choose between intense competition at the efficient scale or a cost disadvantage.


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