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.
A cell phone plan costs $500 plus $0.50 for every minute of usage over 2,000 minutes.
A widget factory pays $5 per widget on material costs.
A car lease costs $10,000 plus $5 for every mile driven over 10,000.
Rent expense for a factory costs $20,000 per month.
A widget factory buys a new machine with annual depreciation of $8,000.
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.
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.