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Chapter 4

Cost equations

6.1 Equation of a straight line

Cost equations are derived from historical cost data. Once a cost equation has been
established, for example distinguishing the fixed and variable costs using the
high/low method, it can be used to estimate future costs. Cost equations are
assumed to have a linear function and therefore the equation of a straight line can be
applied

y = a + bx

where: y = dependent variable

x = independent variable

a = intercept on y-axis

b = gradient of the line

Illustrations and further practice

Now try TYU questions 9 and 10 from Chapter 4

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