Mixed Costs

There are several ways to analyze mixed costs. First, you must be able to identifymixed costand distinguish it from costs that have onlyfixed costorvariable costcharacteristics. 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 Magnuson Consulting, a strategic consulting firm.

Month	Billable Hours	Total Cost
April	900		$69,000
May	260			62,600
June	1,200			72,000
July	1,300			73,000
August	1,700			77,000

For this business, theactivity baseis _________________ , and the _________________ is 260 hours 1,700 hours.

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

Conduct a cost analysis for Magnuson Consulting, a strategic consulting firm, 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.

	Billable Hours	Total Cost
Highest level	_________________	$ _________________
Lowest level	_________________	$ _________________
Difference	_________________	$ _________________

The total fixed cost for a business _________________ 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 $ _________________ is the change in _________________ cost.

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 , or in this case, the variable cost per hour, is used to find the fixed cost.

Variable Cost per Hour =?

Variable Cost per Hour =	$ _________________		=	_________________ per Hour
_________________ Hours

Calculating Fixed Cost

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), wherefcis fixed costs andvcis variable cost per unit the total fixed costs can be determined.

Fixed Cost =?

Highest level (1,700 hours)

Fixed Cost	=	$ _________________		( $ _________________ per hour x 1,700)
Fixed Cost	=	$ _________________

Lowest level (260 hours)

Fixed Cost	=	$ _________________		( $ _________________ per hour x 260)
Fixed Cost	=	$ _________________

Determining the Total Cost Formula

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	=	?
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 hours.

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