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Fixed cost allocation and the constrained product mix decision

✍ Scribed by Susan Haka; Fred Jacobs; Ronald Marshall

Publisher
Elsevier Science
Year
2002
Tongue
English
Weight
755 KB
Volume
19
Category
Article
ISSN
0882-6110

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✦ Synopsis

This paper focuses on the benefits of fixed cost allocation in product mix decisions . We show that in a constrained production environment where at least one factor of production is fixed and in short supply, oligopoly firms can earn higher profits by allocating the costs of these fixed factors . The higher profits occur because the use of full absorption product costs leads firms closer to mix decisions that would be made if they were able to collude . A duopoly example is presented to illustrate these profit effects, and the necessary conditions for higher absorption costing profits are developed and explained .

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