Question

If costs are represented by the formula TC = a + bX, “b” is:

Answer 1

Solution:

If costs are represented by the formula TC = a+bX, then "b" is:

Answer: Variable Cost per unit of activity

Explanation: The cost formula TC = a+bX is basically the algebric formula of mixed costs which consist of total fixed cost and total variable cost calculated on the basis of level of activity. In the cost formula TC = a+bX,

TC = Mixed cost, the sum of Total Fixed Cost and Total Variable Cost.

a = Total Fixed Cost per period which remains constant on any level of acitivity.

b= Variable Cost per unit of activity.

X= Level of Activity (Number of Units of Activity)

"b" i.e. Variable Cost per unit of activity will always remain constant and it is multiplied by the "X" i.e. Level of Activity (Number of Units of Activity) to arrive at the Total Variable Cost. Total Variable Cost changes with the change in level of activity.

Thus, with the help of above explanation, in the cost formula TC = a+bX, we conclude that "b" represents Variable Cost per unit of activity.