The Basic Problem with the Average-Cost Approach Is That It

question 46

Multiple Choice

The basic problem with the average-cost approach is that it

• A) does not consider cost variations at different levels of output.
• B) does not consider historical values.
• C) does not add a reasonable markup to the average cost of a product.
• D) is not commonly used.
• E) is a complex method.

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Definitions:

Profitability Index

A financial metric that measures the return on a project or investment relative to its cost, calculated by dividing the present value of future cash flows by the initial investment cost.

Internal Rate

Typically refers to the internal rate of return (IRR), which is a financial metric used to estimate the profitability of potential investments.

Payback Period

The amount of time it takes for an investment to generate cash flows sufficient to recover its initial cost, commonly used to assess the feasibility of projects.

Operating Assets

Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes.