ACCA PM Syllabus C. Decision-making Techniques - The Straight Line Demand Equation - Notes ^{3 / 6}

The equation of a straight line is represented by the following equation: -

The gradient of the line =

ΔP = -b
----
ΔQ

Total cost function

The total cost function is linear: -

‘a’  is the fixed cost per period

‘b’ is the variable cost per unit

‘x’ is the activity level

‘y’ is the total cost = fixed cost +  variable cost

Cost equations including volume-based discounts

Suppliers often offer discounts to encourage the purchase of increased volumes.

Where volume-based discounts are offered, a total cost equation can be derived for each volume range.

Illustration

Variable Cost: $5 up to 10,000 units. 10% discount applies on all units purchased over 10,000 units.

Total Fixed Costs: $100,000

x ≤ 10,000 , TC = 100,000 + 5x

x ≥ 10,001 , TC = 100,000 + 4.5x