Question

During periods when costs are rising and inventory quantities are stable, what will be the cost of goods sold?

1) Decreasing
2) Increasing
3) Stable
4) Cannot be determined

Answer 1

During periods of rising costs and stable inventory quantities, the cost of goods sold would typically be increasing due to the effects of higher production costs on the price of goods sold in an increasing cost industry.

Step-by-step explanation:

When examining the impact of cost changes on the cost of goods sold during periods of rising costs and stable inventory quantities, it is understood that the cost of goods sold would be increasing. This is because, within an increasing cost industry, as demand rises, the cost of production for firms increases, leading to higher prices for the goods sold. This concept is supported by the reference to a scenario where sellers are unable to increase supply as much as demand due to scarce inputs or rising wages, resulting in a rise in the equilibrium price.

Moreover, in the context of stable inventory levels, the cost of goods sold won't decrease or stay stable if each unit's cost is rising. Therefore, the most accurate prediction is that the cost of goods sold will increase in situations where costs are going up and inventory amounts are constant.