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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