Managers often assume a strictly linear relationship between cost and level of activity. How can this practice be defended in the light of the fact that many cost are curvilinear?

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Business

Judd

12 April, 04:26

Managers often assume a strictly linear relationship between cost and level of activity. How can this practice be defended in the light of the fact that many cost are curvilinear?

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Arturo · Answer 1

Its an interesting debate. We know that costs do not have any linear relation with activity level. This cost usually is curvy-linear but instead of using curvy-linear relation, we deem that the relation between cost and activity level is linear because it is fact that their are ranges of activity levels during which the fixed cost remains constant where as the variable cost increases with the increase in the activity level. Constant increase in Total variable cost is witnessed for every increase in level of activity which is in this relevant range.

For example

If we say that

Variable cost per unit is $6 from zero to 100,000 units

and

Variable cost per unit is $5 from 100,001 to 300,000 units

So this is dependant upon the level of activity. Another practical example is if we order above $100,000 raw material we will receive a bulk discount and the variable cost will drop to $5 per unit from $6 per unit.