Final answer:
In the given formula, X represents the estimated total amount of the allocation base, which is a metric used to distribute overhead costs. Average variable costs are U-shaped and when lower than the market price, imply potential profits minus fixed costs. The average fixed cost curve shows decreasing costs per unit with increased production, illustrating the concept of spreading the overhead.
Step-by-step explanation:
In the formula Y = a + bX, X represents the estimated total amount of the allocation base. The allocation base is a measure of activity used to assign costs to cost objects, and it is essential in calculating both the variable and fixed components of the total manufacturing overhead cost.
When addressing average variable costs, we use the calculation where variable cost is divided by the total output at each level of output. Average variable costs are typically U-shaped. Moreover, if a firm's average variable cost of production is lower than the market price, the firm would be earning profits when excluding fixed costs, which are considered overhead.
An average fixed cost curve, considering a fixed cost of $1,000, will generally decrease as output increases. This demonstrates the principle of spreading the overhead, which means as more units are produced, the fixed cost per unit decreases, making the production process more efficient and cost-effective.