Smith Company Has Developed the Following Information About Two Products

question 94

Multiple Choice

Smith Company has developed the following information about two products:
$\begin{array}{lll}& \text { Cost Per Unit } & \text { Cost Per Unit } \\\text { Approach } & \text { Product 1 } & \text { Product 2 } \\\text { Traditional } & \$ 5,400 & \$ 2,500 \\\mathrm{ABC} & \$ 6,000 & \$ 2,400\end{array}$
If managers believe the ABC approach is more accurate to cost products than the traditional approach,then ________.

• A) the traditional approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
• B) the traditional approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2
• C) the ABC approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
• D) the ABC approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2

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Definitions:

Price System

The mechanism through which the prices of goods and services are established in a market economy, based on supply and demand.

Disinflation

A reduction in the rate of inflation; a slowdown in the rate at which prices increase.

Hyperinflation

A significantly rising inflation rate that accelerates quickly, leading to a swift decrease in the value of currency.

Variety

The range of different items, products, or choices available within a category or market.