When Estimated Costs Are Used in Applying the Cost-Plus Approach

question 106

True/False

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based upon ideal levels of performance.

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Definitions:

Long-run Average Total Cost

The average total cost when all factors of production are variable and economies of scale are fully exploited, indicating the lowest possible cost per unit.

Economies of Scale

Economies of scale refer to the cost advantage that arises with an increased output of a product, as fixed costs are spread out over more units of production, leading to a decrease in the per-unit cost.

Diseconomies of Scale

The phenomenon where production costs increase as a firm's production scale becomes too large, leading to inefficiencies.

Diseconomies of Scale

The phenomenon where production costs increase as a company grows larger, leading to reduced efficiency.