1. 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.

 

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.

 

2. 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	Â	$44,400	Â	Â
May	800	Â	Â	42,800	Â	Â
June	1,200	Â	Â	49,200	Â	Â
July	1,300	Â	Â	50,800	Â	Â
August	1,700	Â	Â	57,200	Â	Â

 

 

For this business, the activity base is

 

A Units produced

B Machine Hours

C Wages Paid

D Total Expenses

 

And the incremental range OR , relevant range, OR  total cost range, OR fixed cost range is 800 units – 1,700 units.( Pick which highlighted one)

 

APPLY THE CONCEPTS: Use the high-low method to conduct a cost analysis

Conduct a cost analysis for Strobel Tool and Die, a maker of various car parts, using the high-low method. First, calculate the difference between the levels of activity and total cost at its highest and lowest levels. Enter all amounts as positive numbers.

Â	Units Produced	Total Cost
Highest level	Â	$Â	Â
Lowest level	Â	$Â	Â
Difference	$

 

The total fixed cost for a business_____1_____ change with changes in activity levels. This means that the difference in total cost between the highest and lowest activity levels in the amount of $_______2____  is the change in _______3____cost.

 

1. Does, does not, exhibits an unknown, or might

2.

3. fixed, irrelevant, unidentified, variable

 

Calculating the Variable Cost per Unit, Using the High-Low Method

Next, calculate the variable cost per unit, using the high-low values. The variable cost per unit is used to find the fixed cost.

Variable Cost per Unit = Difference in total cost/ Difference by Activity  

Variable Cost per Unit =

$_______________ = per unit

___________Units

The fixed cost at any given level of activity can now be estimated. By selecting either the high or the low set of data and using the previously calculated variable cost per unit of billable data in the formula for a straight line — Y = fc + (vc x Units), where fc is fixed costs and vc is variable cost per unit — the total fixed costs can be determined.

Fixed Cost = Total cost – (variable cost per unit x activity level)

Highest level (1,700 units)

Fixed Cost = $__________ - ($________ per unit x 1,700)

Fixed Cost = $__________

Lowest level (800 units)

Fixed Cost = $__________ - ($________ per unit x 800)

Fixed Cost = $__________

Determining the Total Cost Formula (Total Cost = Fixed cost + (variable cost per unit x activity level)

Now that the fixed and variable cost elements are known, determine the formula that mathematically displays the calculation of total cost with mixed cost elements.

Total Cost = $_________ + ($__________ x Activity Level)

After determining the formula for total cost, calculate what the total cost would be if the company were to have an activity level of 1,500 units.

Total Cost = $________ + ($________ x 1,500)

            = $__________

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