High-low method
From two observations of output and total cost you can find the variable cost per unit and the fixed costs. An exam classic.
Worked example
These total costs were recorded in two months. Split them into fixed and variable costs with the high-low method.
| Month | Output | Total cost |
|---|---|---|
| low | 2,500 | £20,000.00 |
| high | 3,500 | £22,000.00 |
Worked solution
- 1.Variable cost = change in cost / change in output = £2,000.00 / 1,000 = £2.00
- 2.Fixed = C₁ − variable × x₁ = £20,000.00 − £2.00 × 2,500 = £15,000.00
Typical mistake: Taking C₂ / x₂ as the variable cost; it still contains fixed costs.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
These total costs were recorded in two months. Split them into fixed and variable costs with the high-low method.
| Month | Output | Total cost |
|---|---|---|
| low | 3,200 | £34,000.00 |
| high | 7,000 | £62,500.00 |
Variable cost per unit in £
Fixed costs in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Total cost = fixed + variable × x
- Cost per unit = total cost / x
- High-low: variable = (C₂ − C₁) / (x₂ − x₁), then fixed = C₁ − variable × x₁
Typical mistake: Taking C₂ / x₂ as the variable cost; it still contains fixed costs.
Frequently asked questions
What is the typical mistake in "High-low method"?
Taking C₂ / x₂ as the variable cost; it still contains fixed costs.
Why does cost per unit fall with output?
Fixed costs are spread over more units.