US CMA Part 1 · Chapter 6 · Question 18 of 22
A cost estimation equation was derived from data on production between 2,000 and 6,000 units per month. Why should managers be cautious about using it to predict costs at 12,000 units?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The prediction lies outside the relevant range, where the cost relationship may not hold
Explanation
Regression results are reliable only within the relevant range of the data used to estimate them. Extrapolating far beyond that range is risky because fixed costs may step up and variable cost rates may change, for example through overtime or capacity constraints.
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