9.15
Linear cost approximation.
(25 min)
1
Slope coefficient (b) = Difference in cost
Difference in labour hours
=
€529,000 €400,000 7,000 4,000
–
–
=
€43.00
Constant
(a) =
€529,000
− €43.00 (7,000)
=
€228,000 Cost function
= €228,000 + €43.00 (professional labour-hours) The linear cost function is plotted in Solution Exhibit 9.15. No, the constant component of the cost function does not represent the fixed overhead cost of Marre-Quise. The relevant range of professional labour-hours is from 3,000 to 8,000. The constant component provides the best available starting point fora straight line that approximates how a cost behaves within the 3,000–
8,000 relevant range.
2
A comparison at various levels of professional labour-hours is as follows. The linear cost function is based on the formula of €228,000 per month plus €43.00 per professional labour-hour. Total overhead cost behaviour
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