A linear cost function is a mathematical method used by companies to determine the total costs associated with a specific amount of production.
A linear cost function is a mathematical method used by companies to determine the total costs associated with a specific amount of production. This cost estimating method can be done as long as the cost of each unit produced remains the same, no matter how many units are produced. When this is the case, the linear cost function can be calculated by adding the variable cost, which is the cost per unit times the units produced, to the fixed costs. Running this equation will give you the total cost of a production order, allowing companies to budget accordingly and make decisions on production values.
Managers of companies that focus on some type of production or manufacturing must be cost conscious at all times. Simply counting all costs once production is complete can lead to big problems if costs exceed expectations. For this reason, managers must develop cost estimating methods that are accurate and reliable. A simple method of cost estimation involves the use of a linear cost function.
Using a linear cost function requires a basic understanding of how the 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 to study the relationship between them when the function is executed. 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 to produce. Multiplying these two numbers produces the variable costs in this feature, which works out to be $50,000 USD. On top of that total, $3,000 is needed just to get the factory up and running for any type of production. These 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 is important to note that the linear cost function in this case works because the widgets always cost the same 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 show a straight line. This process would not work if the individual cost to make each widget varies depending on the size of the order.