Fixed costs generally do not impact a pricing decision.

Fixed costs generally do not impact a pricing decision.

• A. True
• B. They affect price only if they are variable
• C. False
• D. They ignore fixed costs in pricing

Answer: (C)

Pricing decisions must cover all costs the business incurs, not just the costs that change with output. Fixed costs, while constant per period, still need to be recovered through the price set for products or services. That means the price should provide enough contribution per unit (price minus variable cost) so that, across expected sales, total contribution covers fixed costs and desired profit. For example, if fixed costs are $100,000 and the variable cost per unit is $20, and you price at $30, the contribution per unit is $10. You’d need 10,000 units sold to break even on fixed costs ($100,000 ÷ $10). If you ignore fixed costs and price solely on variable costs, you risk selling at a level that doesn’t cover total costs, leading to losses. So fixed costs do influence pricing decisions; the statement is not correct.

Pricing decisions must cover all costs the business incurs, not just the costs that change with output. Fixed costs, while constant per period, still need to be recovered through the price set for products or services. That means the price should provide enough contribution per unit (price minus variable cost) so that, across expected sales, total contribution covers fixed costs and desired profit.

For example, if fixed costs are $100,000 and the variable cost per unit is $20, and you price at $30, the contribution per unit is $10. You’d need 10,000 units sold to break even on fixed costs ($100,000 ÷ $10). If you ignore fixed costs and price solely on variable costs, you risk selling at a level that doesn’t cover total costs, leading to losses.

So fixed costs do influence pricing decisions; the statement is not correct.