Question

Which of the following is a mixed cost?

a) a cost that is $32.00 per unit when production is 80,000 and $40.00 per unit when production is 128,000.

b) a cost that is $64.00 per unit when production is 80,000 and $64.00 per unit when production is 128,000.

c) a cost that is $32.00 per unit when production is 80,000 and $32,000 per unit when production is 128,000.

d) a cost that is $32.00 per unit when prodcution is 80,000 and $26,000 per unit when production is 128,000.

Answer 1

• Mixed Cost is that cost which has the characteristics of both – Variable and Fixed Cost:

>Part of it remains same per unit, and varies in total as output changes.

>Part of it remains fixed.

• Correct Answer = Option ‘D’ Cost is $ 32 per unit at 80,000 units and $ 26 per unit at $ 128,000 units.
• Proving that above answer is right using High Low Method:

		Units	Cost
High Level		128,000	$             3,328,000.00 [128000 x 26]
Low Level		80,000	$             2,560,000.00 [80000 x 32]
Difference		48,000	$                768,000.00

Difference in Cost	$                                                          768,000.00
Difference in units	48,000
Variable cost per unit	$                                                                     16.00

Working		High Level	Low Level
A	Total Cost	$           3,328,000.00	$             2,560,000.00
B	Total Units	128000	80000
C	Variable cost per unit	$                         16.00	$                           16.00
D = B x C	Total Variable cost	$           2,048,000.00	$             1,280,000.00
E = A - D	Total Fixed Cost	$           1,280,000.00	$             1,280,000.00

• The above calculation verifies that Fixed cost under both high and low level is same as $ 1,280,000 and Variable cost per unit = $ 16. Hence, the cost is a MIXED COST, with variable cost portion of $ 16 per unit and Fixed Cost portion of $ 1,280,000