Ace Shoe Co. has fixed costs of $6 million and unit variable costs of $5 per pair. Suppose a consultant tells Ace it can sell 700,000 pairs of shoes, it should seek a profit of $2.5 million, and it should select an appropriate price to meet that 700,000 target. What potential error is the consultant making?
A)assuming that some variable costs are fixed
B)assuming that units sold is independent of price
C)assuming that fixed costs are independent of price
D)assuming that some fixed costs are variable

Question

Quizplus · Accepted Answer

The potential error the consultant is making is assuming that units sold is independent of price. This may not be the case, as increasing the price may lead to a decrease in demand, and thus a lower number of units sold. The consultant should consider the price elasticity of demand before suggesting a price that will meet the target of 700,000 units.