Final answer:
The assertion that full-cost pricing only allocates fixed costs that can be directly attributed to the production of the specific priced item is false. Full-cost pricing involves allocating a portion of fixed costs across all units produced, along with including variable costs that do directly fluctuate with production levels.
Step-by-step explanation:
Full-cost pricing does not allocate fixed costs directly to the production of a specific priced item; rather, it includes both the variable costs directly associated with production and an allocated portion of fixed costs. Fixed costs, by nature, cannot be directly attributed to the production of a specific item because they are costs that a firm incurs before producing any output, such as rent or salaries for employees. These costs are considered sunk costs and do not vary with the level of production. Essentially, fixed costs should play no role in the decision-making process regarding future production or pricing because they cannot be altered even if production levels change.
On the other hand, variable costs are directly related to the act of producing and show diminishing marginal returns, meaning that the cost of producing additional units increases after a certain point. This is due to the resources used to produce more goods becoming less efficient. Hence, in full-cost pricing, while variable costs are closely tied to the production levels, fixed costs are spread out across all units produced, regardless of the quantity.
When setting prices, companies consider both types of costs, along with desired profit, to determine the final price of a product (reflected in Figure 3.12 Setting Prices).