Average-cost pricing will result in larger than expected profit:
A) most of the time.
B) if the average fixed cost estimate is based on a quantity that is smaller than the actual quantity sold.
C) if the average total cost is higher than expected.
D) only if the manager makes arithmetic errors in computing average variable cost.
E) None of the above is correct.

Question

Quizplus · Accepted Answer

Average-cost pricing calculates the price based on the average cost of production, which includes both fixed and variable costs. If the estimate for average fixed cost is based on a quantity that is smaller than the actual quantity sold, then the resulting price will be higher than necessary to cover the fixed costs, resulting in a larger than expected profit. This is because the fixed costs are spread over a larger quantity than initially anticipated, decreasing the average fixed cost and increasing the overall profit margin.

Average-Cost Pricing Will Result in Larger Than Expected Profit