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High low method

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There were several methods discussed in Chapter 5 as to estimation of a company's fixed and variable costs. Choose one of these methods, and discuss that method's advantages and disadvantages.

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Solution Summary

Your response discusses the high low method, gives the technique, two advantages and three disadvantages.

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One method is high low method. This method uses two data points to solve for the variable portion of the cost and then the fixed portion of the cost:

Change in cost....... = variable portion
-----------------------
Change in activity

Then you put the variable cost into this equation to solve for fixed component:

Costs = variable portion (activity) ...

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