The Problem with Using Full Absorption Cost Information When Setting

question 39

True/False

The problem with using full absorption cost information when setting prices is that it clouds the true relationships among price,volume,and costs by including fixed expenses in unit cost.

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Definitions:

Cash Operating Expenses

Expenses that a company pays in cash during an accounting period, excluding non-cash expenses such as depreciation.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and outflows over a period of time, used in capital budgeting to assess the profitability of an investment.

Discount Rate

The rate of interest utilized in the process of discounted cash flow analysis for assessing the present worth of future cash flows.

Profitability Index

A financial tool that calculates the relationship between the costs and benefits of a proposed project through its net present value.