Holding all other things constant, an increase in fixed production costs will affect:
A) the selling price under the absorption costing approach to cost-plus pricing.
B) the profit-maximizing price.
C) both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price.
D) neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

Question

Quizplus · Accepted Answer

Under the absorption costing approach to cost-plus pricing, fixed production costs are included in the cost base, so an increase in fixed production costs would increase the selling price. However, the profit-maximizing price is determined by marginal cost and demand, not fixed costs, so it remains unaffected.

Holding All Other Things Constant, an Increase in Fixed Production