What are some reasons that net PP&E might grow proportionally to sales, and what are some reasons that it might not?

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What are some reasons that net PP&E might grow proportionally to sales, and what are some reasons that it might not?

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What are some reasons that net PP&E might grow proportionally to sales, and what are some reasons that it might not?

Explanation & AnswerSolution by a verified expert

Explanation

When a new PP&E is installed, the companies generally install some extra capacity by producing additional units either by running machines in extra shifts or by increasing its speedĀ  which helps in maintaining economies of scale in the long run. Therefore, in the short run, such an imbalance between sales and capacity of PP&E makes it difficult for both to grow proportionally.
 
When economies of scale are achieved and competition in the market is high, the existing extra capacity of PP&E can be helpful in achieving the high sales. Hence, it can be assumed that sales and capacity of PP&E can grow proportionally with sales in the long run.

Verified Answer

In the short run, the PP&E provide more capacity than actual demand. Thus, the value of the PP&E is usually more than the corresponding sales value for a short period of time.
 
However, in the long run the capacities of PP&E matches the required sales due to larger economies of scale. Thus, the value of the PP&E correlates with the sales in the long run.

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