Which method is used to deduce the fixed and variable aspects of a semi-fixed cost?

Which method is used to deduce the fixed and variable aspects of a semi-fixed cost?

• A. Break-even analysis
• B. Regression analysis
• C. High-low method
• D. Scatter plot analysis

Answer: (C)

High-low method is used to separate the fixed and variable parts of a semi-fixed cost. It rests on the idea that total cost can be split into a fixed amount plus a variable amount that changes with activity. To apply it, take the highest and lowest activity levels and their total costs. The variable cost per unit is found by the difference in total costs divided by the difference in activity levels. Then the fixed cost is the total cost at either point minus the variable cost per unit times the corresponding activity level. This gives an estimate of the fixed component and the variable cost per unit. The method is simple and uses only two data points, which makes it a quick way to approximate cost behavior. While regression uses all data points to fit a line and assess fit, and scatter plots are mainly for visual inspection, and break-even analysis focuses on profitability rather than decomposing cost behavior, the high-low method directly targets the fixed versus variable split for a semi-fixed cost.

High-low method is used to separate the fixed and variable parts of a semi-fixed cost. It rests on the idea that total cost can be split into a fixed amount plus a variable amount that changes with activity. To apply it, take the highest and lowest activity levels and their total costs. The variable cost per unit is found by the difference in total costs divided by the difference in activity levels. Then the fixed cost is the total cost at either point minus the variable cost per unit times the corresponding activity level. This gives an estimate of the fixed component and the variable cost per unit. The method is simple and uses only two data points, which makes it a quick way to approximate cost behavior. While regression uses all data points to fit a line and assess fit, and scatter plots are mainly for visual inspection, and break-even analysis focuses on profitability rather than decomposing cost behavior, the high-low method directly targets the fixed versus variable split for a semi-fixed cost.