Chapter 10, Problem 10.1Q

What two assumptions are frequently made when estimating a cost function?

To determine

To explain: Two assumptions made while estimating a cost function.

Answer to Problem 10.1Q

Two assumptions basically include change in certain activity and related range of particular cost occurring in a certain manner.

Explanation of Solution

Cost Function:

Cost function represents the basic change that occurs in the total cost due to the change in the level of particular activity. Cost function’s main two aspects are dependent variable and independent variable.

While estimating cost function, it is required to assume below mentioned assumptions:

• Firstly, disparity in total cost is based on disparity in particular activity of that cost.
• Appearance of a linear cost function of cost behavior in between the relevant range.
• Relevant range shows the equation or relation between the measure of activity and total cost.

Hence, cost function is primarily based on two assumptions related to the variation and behavior of cost.