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Tutor, In Notes chapter 19, you made regression analysis with help of linear function.
An assumption is made that a cost equation has linear function.
Why is this? Do we think that only two elements of cost behavior (fixed and variable) affect cost equation or there is any other reason for such assumption?There are only two elements – fixed costs and variable costs.
With regression analysis we assume that the variable costs are fixed per unit (and therefore there is a linear relationship). This might not be the case but for regression analysis in Paper MA we assume that to be the case.
Thank you. You mean to say that variable cost per unit is constant and activity level varies. Activity level increases due to which Total variable cost increases. This is linear relationship, right?
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