Mixed Costs Analysis Using the High-Low Method

Businesses separate mixed costs into fixed and variable components to analyze cost behavior and profitability.

The high-low method uses the highest and lowest activity levels and costs to separate these cost components.

For instance, consider SwiftShip Delivery.

SwiftShip’s delivery cost includes fixed and variable costs.

To analyze these costs, SwiftShip reviewed total delivery costs over six months.

The highest activity level was eight thousand deliveries, with a total delivery cost of twenty-two thousand dollars.

The lowest activity level was three thousand deliveries, with a total delivery cost of thirteen thousand five hundred dollars.

The variable cost per delivery is the cost difference divided by the delivery difference.

This gives a variable cost of one dollar and seventy cents per delivery.

Then, SwiftShip estimates the fixed cost using the high point of eight thousand deliveries. It is calculated by subtracting the total variable cost from the total cost at high point. The fixed cost estimate remains the same whether the high point or the low-point is used.

To sum up, the high-low method helps managers at SwiftShip estimate how delivery costs change as the number of deliveries changes.