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
A housekeeper makes $10 dollars per hour to clean hotel rooms.	SelectFixed CostMixed CostVariable CostCorrect 1 of Item 1
A cell phone plan costs $500 plus $0.50 for every minute of usage over 2,000 minutes.	SelectFixed CostMixed CostVariable CostCorrect 2 of Item 1
A widget factory pays $5 per widget on material costs.	SelectFixed CostMixed CostVariable CostCorrect 3 of Item 1
A car lease costs $10,000 plus $5 for every mile driven over 10,000.	SelectFixed CostMixed CostVariable CostCorrect 4 of Item 1
Rent expense for a factory costs $20,000 per month.	SelectFixed CostMixed CostVariable CostCorrect 5 of Item 1
A widget factory buys a new machine with annual depreciation of $8,000.	SelectFixed CostMixed CostVariable CostCorrect 6 of Item 1
A farmer has a contract with a grocery chain that pays $5,000 guaranteed money plus $2 for every bushel of produce above 50,000 bushels.	SelectFixed CostMixed CostVariable CostCorrect 7 of Item 1

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			$69,000
May	740			67,400
June	1,200			72,000
July	1,300			73,000
August	1,700			77,000

For this business, the activity base is Selectunits producedmachine hourswages paidtotal expensesCorrect 1 of Item 2, and the Selectincremental rangerelevant rangetotal cost rangefixed cost rangeCorrect 2 of Item 2 is 740 units 1,700 units.

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.

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

The total fixed cost for a business Selectdoes notdoesexhibits an unknownmightCorrect 7 of Item 3 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 SelectfixedirrelevantunidentifiedvariableCorrect 9 of Item 3 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 is used to find the fixed cost.

Variable Cost per Unit = ?

Variable Cost per Unit =	$		=	per Unit
	Units

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), where fc is fixed costs and vc is variable cost per unit the total fixed costs can be determined.

Fixed Cost = ?

Highest level (1,700 units)

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

Lowest level (740 units)

Fixed Cost	=	$		( $ per unit x 740)
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 units.

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