1. Why is a scattergraph a good first step in decomposing mixed costs into their fixed and variable components?
2. Describe how the scatterplot method breaks out the fixed and variable costs from a mixed cost. Now describe how the high-low method works. How do the two methods differ?
3. What are the advantages of the scatterplot method over the high-low method? The high-low method over the scatterplot method?
4. Describe the method of least squares. Why is this method better than either the high-low method or the scatterplot method?
5. What is meant by the "best-fitting line"?
6. Is the best-fitting line necessarily a good-fitting line? Explain.
7. Describe what is meant by "goodness of fit." Explain the meaning of the coefficient of determination.
8. What is the difference between the coefficient of determination and the coefficient of correlation? Which of the two measures of goodness of fit do you prefer? Why?
9. When is multiple regression required to explain cost behavior?
10. Some firms assign mixed costs to either the fixed or variable cost categories without using any formal methodology to separate them. Explain how this practice can be defended.