Linear cost function is a method used by companies to determine total costs of production. It involves adding variable and fixed costs to calculate the total cost of a production order, allowing companies to budget and make decisions about production amounts. This method works if the cost of each unit produced remains the same.
A linear cost function is a mathematical method used by companies to determine the total costs associated with a specific amount of production. This method of cost estimation can be done as long as the cost of each unit produced remains the same, no matter how many units are produced. When that is the case, the linear cost function can be calculated by adding the variable cost, which is the cost per unit multiplied by the units produced, to the fixed costs. Carrying out this equation will give the total cost of a production order, allowing companies to budget accordingly and make decisions about production amounts.
Managers of companies that focus on some type of production or manufacturing must keep costs in mind at all times. Simply counting all the costs after production is done can lead to major problems if costs exceed expectations. For that reason, managers must develop cost estimation methods that are accurate and reliable. A simple cost estimation method involves the use of a linear cost function.
Using a linear cost function requires a basic understanding of how functions work. A function is a mathematical equation performed on any set of values that then produces a corresponding set of values. These values can be plotted on a graph to study the relationship between them when the function is performed. If the function produces a straight line on the graph when values are entered, it is known as a linear function.
To see an example of how a linear cost function is used to estimate production costs, imagine that a company decides to fill an order for 1,000 widgets that cost $50 US dollars (USD) each to produce. Multiplying these two numbers produces the variable costs in this function, which equals $50,000 USD. On top of that total, $3,000 USD is required to just get the factory up and running for any type of production. Those costs, which are the fixed costs in this equation, are added to the variable costs to leave a total of $53,000 USD for this particular order.
It’s important to note that the linear cost function in this case works because widgets always cost the same amount to produce. If a graph were produced with the number of widgets produced on one axis and the total costs on the other, it would reveal a straight line. This process would not work if the individual cost to make each widget varies depending on the size of the order.
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