C HAP TE R 9 Determining how costs behave Teaching tips and points to stress General issues in estimating cost functions Linearity means that within the relevant range (RR, all costs are either totally fixed or truly variable. Although economists suggest that total costs are likely to behave in a nonlinear fashion, a linear approximation maybe reasonable within the RR. Whether the linear approximation is acceptable depends on the cost of more sophisticated analysis as against the likelihood of improved decisions from more accurate cost estimates. Classification of labour as a VC or FC often depends on how employees are paid. In many fast- food chains, if sales are insufficient to justify the number of employees at the store, some employees are sent home and paid only for the hours they worked. Here, labour is a VC. Conversely, fora manufacturer with a stable, guaranteed-wage workforce, labour is not a VC.
