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ACCA Applied Skills · Performance Management · Pricing decisions

A company currently sells 10,000 units at a full-cost-plus price. Budgeted fixed overheads are $120,000 and are absorbed on 10,000 units. Actual output is expected to fall to 8,000 units, while total fixed overheads and the variable cost per unit are unchanged. If the company re-calculates its full cost price on the basis of 8,000 units, which is the most likely effect on the price?

The price will rise, because the same total fixed overheads are spread over fewer units, increasing the fixed cost per unit from $12 to $15. This is a recognised weakness of full cost-plus pricing, as it ignores demand.

  1. AThe price will rise, because fixed cost per unit increasesCorrect
  2. BThe price will fall, because variable cost per unit decreases
  3. CThe price will stay the same, because total fixed costs are unchanged
  4. DThe price will fall, because demand is lower

Explanation

Fixed overhead per unit rises from $12 to $15 when spread over 8,000 units, so full cost and therefore the cost-plus price rise. Variable cost per unit is unchanged. This illustrates the weakness of full cost-plus pricing: it can increase prices when demand falls, worsening the decline.

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