If product costs plus allocated support costs are used to set prices:
I. Prices increase as the volume of production decreases
II. Price increases cause further decreases in quantity demanded, causing production to decrease
III. The company may eventually go out of business
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

When product costs plus allocated support costs are used to set prices, as production volume decreases, the fixed support costs are spread over fewer units, increasing the cost per unit and thus the price. This can lead to a cycle where high prices reduce demand further, leading to lower production volumes and even higher prices, potentially driving the company out of business.

If Product Costs Plus Allocated Support Costs Are Used to Set