Question

The financial analyst at Company ABC gathered cost information for one element of the cost of its high performance widgets. In January, when ABC made 100 units, the cost was $8,000. In February when ABC made 140 units, the cost was $10,560. Which of the following is true?

a. The cost is a fixed cost.

b. The cost is a variable cost

c. The cost is a mixed cost.

d. The cost was a fixed cost in January and a variable cost in February.

Answer 1

c. The cost is a mixed cost.

At 100 units, Total cost			=	$8,000
At 140 units, Total cost			=	$10,560
As per High-Low Method,
Variable cost per unit			=	(Cost at highest level of activity-Cost at lowest level of activity)/(Highest activity - Lowest Activity)
			=	(10560-8000)/(140-100)
			=	$64.00
Now,
At 100 units, Total cost					=	$8,000
Variable cost			=	100*64	=	$6,400
Fixed Cost						$1,600
and
At 140 units, Total cost					=	$10,560
Variable cost			=	140*64	=	$8,960
Fixed Cost						$1,600
You Can see from the above calculation that fixed cost is same fot both level of activity.
The cost is called as mixed cost when it is combination of fixed cost and variable cost.
Fixed cost remains at all level of activity.
Variable cost per unit is same for all level of activity.
In the current case, Fixed cost is same for both level and variable cost per unit is same for all level of activity.
So, it is an example of mixed cost.

Note:

It is not an example of fixed cost because total cost is not same for both level of activity.

It is also not an example of variable cost because cost per unit is not same for total unit in both case.