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ch10 a - CH 10 10-16(10 min Estimating a cost function 1...

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CH 10 10-16 (10 min.) Estimating a cost function. 1. Slope coefficient = = \$3,900 - \$3,000 7,000 - 4,000 \$5,400 \$4,000 10,000 6,000 - - = \$1,400 4,000 = \$0.35 0 per machine-hour Constant = Total cost – (Slope coefficient × Quantity of cost driver) = \$5 ,4 9 00 – (\$0.35 0 × 10 7 ,000) = \$1,9 8 00 = \$3 4 ,000 – (\$0.35 0 × 6 4 ,000) = \$1,9 8 00 The cost function based on the two observations is Maintenance costs = \$1,9 8 00 + \$0.35 0 × Machine-hours 2. The cost function in requirement 1 is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range. If there are no months with zero machine-hours represented in the maintenance account, data in that account cannot be used to estimate the fixed costs at the zero machine-hours level. Rather, the constant
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