Which of the following statements is true concerning the use of linear analysis at low activity levels (below the range for which the company's facility was designed)?
A) Linear analysis is well suited for estimating total costs at low activity levels.
B) Linear analysis likely understates total costs at low activity levels.
C) Linear analysis likely overstates total costs at low activity levels.
D) Linear analysis of low activity levels fails to capture the fact that total fixed costs decrease as more units are produced.

Question

Quizplus · Accepted Answer

Linear analysis assumes that there is a constant cost per unit, which may not be true at low activity levels. As activity levels decrease, fixed costs become a larger proportion of total costs, resulting in linear analysis likely understating total costs at low activity levels.

Which of the Following Statements Is True Concerning the Use