In describing the cost formula equation Y = a + bX, which of the following statements is correct?Multiple ChoiceIn the high-low method, the b term equals change in activity divided by change in costs.The a term is the fixed component.The X term is the dependent variable.As the X term increases, the Y term decreases.
Question
In describing the cost formula equation Y = a + bX, which of the following statements is correct?Multiple ChoiceIn the high-low method, the b term equals change in activity divided by change in costs.The a term is the fixed component.The X term is the dependent variable.As the X term increases, the Y term decreases.
Solution
The correct statement is: "The a term is the fixed component."
Here's why:
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In the cost formula equation Y = a + bX, 'a' represents the fixed costs that do not change with the level of activity. These are costs that a company must pay regardless of its level of output.
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The 'b' term in the equation represents the variable cost per unit of activity (X). This cost changes in direct proportion to changes in the level of activity. However, in the high-low method, 'b' is calculated as the change in cost divided by the change in activity, not the other way around.
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The 'X' term is the independent variable, not the dependent variable. It represents the level of activity or volume of output.
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The statement "As the X term increases, the Y term decreases" is incorrect. In this cost formula, as the level of activity (X) increases, the total cost (Y) also increases, assuming that 'b' is positive. This is because the variable cost increases with the level of activity.
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