Question

1. What is the difference between variable and fixed costs?

Also, explain how the total variable cost and total fixed cost is affected by increasing the number of units produced? What happens to the total variable cost per unit and total fixed cost per unit?

3. What is a mixed cost?

2. The high-low method of analyzing mixed costs uses only two observation points: the high and low points of activity. Are these always the best points for prediction purposes? Why or why not?

Answer 1

1)Variable cost are costs that change as the quantity of the good or service that a business produces changes.Its variable in nature.Whereas fixed cost doesn't changes with changes in production.They tend to be time-related, such as interest or rents being paid per month, and are often referred to as overhead costs.

The variable cost of production is a constant amount per unit produced. As the volume of production increases, variable costs will also increase. Conversely, when fewer products are produced, the variable costs associated with production will consequently decrease.VC per unit remains constant as production increases.

Fixed cost doesn't change with change in production.It tends to remain fixed over a period of time.The fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.

3)Mixed cost also known as semi variable cost is an expense which contains both a fixed-cost component and a variable-cost component.Utilities including electricity, water and natural gas are usually mixed costs. You are charged a fixed rate for using a base amount and then pay an additional variable charge for any usage over the base amount.

2)The high-low method is used to calculate the variable and fixed cost of a product or entity with mixed costs. It considers the total dollars of the mixed costs at the highest volume of activity and the total dollars of the mixed costat the lowest volume of activity. The total amount of fixed costs is assumed to be the same at both points of activity. The change in the total costs is thus the variable cost rate times the change in the number of units of activity.

These are not best point of predictors because the high or low points used for the calculation may not be representative of the costs normally incurred at those volume levels due to outlier costs that are higher or lower than would normally be incurred. In this case, the high-low method will produce inaccurate results.This formula doesn't take inflation into consideration.