Week 3 Puzzlers and Flash Cards
1.
What are the two assumptions behind a simple linear cost function?
Briefly explain the
three ways that a linear cost function may behave?
Answer:
The two usual assumptions behind a simple linear cost function are
1) Variations in the level of a single activity (the cost driver) explain the
variations in the related total costs;
2) Cost behavior is approximated by a linear cost function within the
relevant range.
This means that total cost versus the level of a single activity that is
related to that cost
is a straight line within the relevant range.
Once linearity is established, there are three possible types of linearity:
1) A strictly variable cost of the form Y = bX, where b is the slope of the
straight line and is the variable cost per unit of the cost driver;
2) A strictly constant cost of the form Y = a, where a is the total fixed
cost or constant;
3) A mixed or semivariable cost of the form Y = a + bX, where a is the total
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 Spring '11
 Hayes
 linear cost function, simple linear cost

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