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 fixed costs are independent of price
B)assuming that units sold is independent of price
C)assuming that some fixed costs are variable
D)assuming that some variable costs are fixed

Question

Quizplus · Accepted Answer

The consultant is assuming that the number of units sold (i.e. 700,000 pairs of shoes) is independent of price. However, the price of a product can have a significant impact on the quantity demanded. Therefore, this assumption may not hold, and Ace Shoe Co. may not be able to sell 700,000 pairs of shoes at the price recommended by the consultant.