Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral.

Question

Quizplus · Accepted Answer

Practical capacity is the maximum amount of output that a company can produce under normal working conditions. Pricing based on practical capacity rather than master-budget volume ensures that the price is based on the actual cost of production, which includes both fixed and variable costs. This helps to prevent demand from declining due to excessive pricing, which can lead to a downward demand spiral. Therefore, practical capacity is a better way to price products.

Practical Capacity Rather Than Master-Budget Volume Is a Better Way