What you’ll learn to do: Summarize the vital elements of mixed price analysis

Mixed expenses contain part variable cost elements in addition to some fixed cost elements. We will define mixed costs and look at various techniques to analysis this type of cost. We will look in ~ both retail and also manufacturing infrastructure in this unit.

You are watching: For purposes of analysis, mixed costs are


Learning Outcomes

Define and also outline examples of mixed expenses in retail and manufacturing businessesDefine dependent variable and independent variableAnalyze mixed prices using the high-low methodUse the least-squares regression technique to produce a regression line on a graph of expense data

Mixed Costs

Mixed prices are those expenses that room a combination of fixed and variable costs with aspects of both. In a graph form, mixed expenses would look choose this:



Let’s assume the we have actually a licensing situation, wherein our basic fee is $500 because that the very first 1,000 widgets, however for each additional widget over 1,000 we sell, we have to pay secondary $1. Looking at the illustration above, the amount included with fixed costs would be $500, because that needs to be payment whether we develop one widget or 5,000 widgets. The variable portion is the $1 per widget.

The equation for mixed expenses looks favor this:

Y= The complete mixed costs

a= The complete fixed costs

b= The variable cost per unit of task (the slope of the heat above)

X= The level of activity.

The steeper the slope on the variable line, the greater the variable cost per unit.

What could be a mixed expense in a retail environment? Rent could be a blended cost. In part leasing situations, there is a basic rent, and then a percentage of sales on height of the base. Let’s imagine the you rent a an are for a small retail ar in your local mall. You room charged a basic rent of $500 every month, plus 2% the sales. The fixed portion of this cost is $500, since you pay the amount even if her sales space zero. The variable portion of this cost will it is in the 2% the sales. For each dissension in sales, girlfriend will add .02 to your rent. If girlfriend look at the graph above you deserve to see how you use this graph come our rental example.


Practice Questions


Independent vs. Dependence Variable

Here is an introduction of mixed costs, and creating a scattergraph to check our theory of the habits of the costs.

You space the maintain supervisor in ~ the local dog groomer. It is budget time, and you space working on your maintenance budget for the year. In an effort to work through your numbers, you an alert that the maintenance price has a fixed component to it. The hypothesis is the for each extr dog groomed, over there is added maintenance cost incurred. Stop look in ~ a couple of months worth of activity:

MonthNumber of dog GroomedTotal maintenance Cost
July560790
August710850
September500740
October650820
November730910
December800980

Going back to our mixed expense formula:

Y= full maintenance cost and also will be plotted ~ above the upright axis of our graph. This cost is the dependency variable due to the fact that the amount counts on the task for the period.

X= the task or variety of dogs groomed. This will certainly be plotted on the horizontal axis and is the independent variable, since it is the aspect that causes the variations in the cost.



So native this graph, you can see that the much more dogs groomed, the higher the maintenance cost, and it is rising in a somewhat direct manner too. This step, producing a scattergraph is done together a very first step to view if our theory is correct, before we relocate on and also do further analysis.


Practice Questions


High-Low Method

In ours previous dog groomer instance we could plainly see v our scattergram the maintenance prices were regarded the variety of dogs groomed. Remember that that to be our early diagnostic step before we moved on to an ext detailed analysis of ours costs.



The scattergram over shows a relatively linear relationship in between the maintenance prices (cost-Y) and also the number of dogs groomed (activity -X) we deserve to use the high-low an approach to calculation which part of our expense is the fixed portion and i m sorry is the variable portion.

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With this an approach we first look because that the period with the shortest level of activity and the greatest level. Going ago to our chart from 7.2.2 the lowest month 500 dogs were groomed and the maintenance price was $740. The highest possible month 800 dogs to be groomed and also the maintenance expense was $980. Currently we deserve to use those number in ours high-low formula:

Variable price = price at the high activity level-cost at the short level the activity

High task level − Low task level

Variable cost = readjust in cost

Change in activity

Variable cost = $980 − $740

800 − 500

Variable price = $240/300 or .80 because that each dog groomed

We have the right to now calculation the fixed expense component. We deserve to use the total cost of either the high or the low and also subtract the variable component:

Fixed expense = complete cost − Variable expense element

Fixed cost= $980 − .8(800) = $980 − $640 = $340 using the highest month

Fixed expense = $740 − .8(500) = $740 − $400= $340 using the shortest month


Note

This an approach can only be used if the scattergram that you used for her initial trial and error shows a straight correlation between the costs and also the quantity! additionally note that although this an approach is an easy to apply it only offers the 2 points the data. Having actually only 2 points that data might produce results that room not accurate. Because of this, the next section on the the very least squares regression will probably be much more useful and reliable because that determining the fixed and also variable portions of mixed costs.