Final answer:
True, cheaper ingredients can indeed cause a favorable price variance but might also result in an unfavorable quantity variance if the ingredient quality necessitates using more. Businesses must balance cost and quality to maintain consumer satisfaction and profitability.
Step-by-step explanation:
The statement 'Cheaper ingredients lead to a favorable price variance, but also may lead to unfavorable quantity variances' is true. A favorable price variance occurs when a company pays less than expected for the resources it purchases, such as ingredients for its products. But, these cheaper ingredients can sometimes lead to an unfavorable quantity variance if their lower quality results in needing more of them to achieve the same result, thereby increasing overall costs. For example, if a lower quality ingredient deteriorates faster or is less effective, more of it may be required compared to a higher quality (and potentially more expensive) ingredient.
In general, the basic model of demand and supply indicates that higher prices typically reduce consumption while lower prices increase it, but this effect has limits. For instance, at a certain high price point, demand for a product will drop, and conversely, if prices drop significantly, even lower quality products may be perceived as valuable. Therefore, businesses must balance the quality and cost of inputs to ensure profitability and consumer satisfaction over time.