What does the high-low method involve?

• A. Using the average of all data points to estimate fixed cost.
• B. Estimating variable cost by regression.
• C. Identifying highest and lowest activity levels and using them to compute variable cost, then substituting back into total cost.
• D. Assuming variable costs are zero at the highest activity level.

Answer: (C)

The high-low method focuses on the extremes of activity to separate fixed and variable costs. You take the total cost at the highest activity level and the total cost at the lowest activity level, and compute the variable cost per unit as (cost at high - cost at low) divided by (high activity - low activity). This gives the variable cost per unit, which is the slope of the cost line. Then you substitute either extreme into the total cost equation (Total cost = Fixed cost + Variable cost per unit × Activity) to solve for the fixed cost. Once you have both components, you can estimate total costs at other activity levels.

This approach uses only two data points to form the cost estimate, unlike methods that rely on all data points or on regression. It also doesn’t assume variable costs are zero at the high level.