Question

The high-low method is used to ________.

A) determine the highest price that can be charged for a product
B) separate mixed costs into their variable and fixed components
C) identify the relevant and irrelevant costs of a business
D) determine the sales level at highest capacity

Answer 1

The high-low method separates mixed costs into variable and fixed components, aiding in long-term financial planning and strategic decision-making for profit maximization. Option B is correct.

Step-by-step explanation:

The high-low method is used to separate mixed costs into their variable and fixed components. This accounting technique is instrumental for cost analysis and helps in the determination of a firm's cost structure. By identifying the highest and lowest activity levels and comparing them to the total costs at each level, businesses can determine the variable cost per unit and the total fixed costs, contributing to more accurate financial planning and analysis.

Understanding and analyzing a firm's cost structure is essential from a long-run perspective. This analysis serves as a foundation for making strategic decisions about the profit-maximizing quantity to produce and the price to charge, in addition to preparing for longer-term production strategies within a given market structure.