Total annual cost (TAC) has three elements: direct costs (DC), indirect costs (IC), and recovery credits (RC), which are related by the following equation:
(7.1)
Clearly, the basis of these costs is one year, a period that allows for seasonal variations in production (and emissions generation) and is directly usable in financial analyses. The various annual costs and their interrelationships are displayed in Figure 7.2.
DC are those that tend to be directly proportional (variable costs) or partially proportional (semi‐variable costs) to some measure of productivity – generally the company’s productive output, but for purposes of pollution control, the proper metric may be the quantity of exhaust gas processed by the control system per unit time. Conceptually, a variable cost can be graphed in cost/output space as a positive sloped straight line that passes through the origin. The slope of the line is the factor by which output is multiplied to derive the total variable cost of the system. Semi‐variable costs can be graphed as a positive sloped straight line that passes through the cost axis at a value greater than zero – that value being the “fixed” portion of the semi‐variable cost and the slope of the line being analogous to that of the variable cost line discussed above.
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