Product costing: absorption costing
. A falling selling price and a rising cost price will result in a reduced profit.

. The only way to increase profits is to reduce costs.

. If selling price does not exceed costs, then entities will not make a profit.

. Currently, a business sells its product for £20 and the cost of making this product is £10. The production director has found a way to reduce the cost of each product by 5%, to £9.50. The marketing director then suggests that the selling price of the product should also fall by 5% as this reduction will increase profits. Is this statement by the marketing director true or false?

. Facts as in Question 4, but the marketing director now says that he meant to say that a reduction in selling price by 5% will lead to a 10% increase in sales of the product and the overall profits of the firm will rise. Current sales levels of the product are 20,000 units per annum.