Blueprint Problem: Cost Behavior and CVP Analysis - Mixed costs and the high-low method

Mixed Costs

There are several ways to analyze mixed costs. First, you must be able to identify mixed cost and distinguish it from costs that have only fixed cost or variable cost characteristics. In the following table, identify which cost is described by each of the given scenarios.

Scenario
An automotive company pays its line workers $20 per hour.

A company leases equipment that costs $100,000 plus $20 for every hour of operation over 10,000 hours.

A consulting firm pays its employees $100,000 for every account they close.

A factory owner pays a flat fee of $20,000 for electricity plus $1 for every 10 kilowatts used over 1 million kilowatts.

An automotive company pays its plant manager a $200,000 annual salary.

A consulting firm pays rent expense of $200,000 for its corporate offices.

A writer earns $50,000 to write articles plus $500 for every article published beyond 50 articles.

The High-Low Method

The high-low method is the most basic method used for analyzing mixed costs. The purpose of this analysis is to estimate the fixed and variable cost components of mixed costs by comparing mixed costs at different levels along the relevant range for the appropriate activity base. Conduct a cost analysis for the following business using the high-low method.

The following table contains data for Strobel Tool and Die, a maker of various car parts.

Month	Units Produced			Total Cost
April	900			$52,600
May	500			47,000
June	1,200			56,800
July	1,300			58,200
August	1,700			63,800

For this business, the activity base is

, and the

is 500 units