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A technique that utilises the highest and lowest observations to determine the fixed and variable cost element.
The change in cost at different output/activity will be a variable cost, as fixed costs do not change with output/activity.
Once variable cost is established, fixed cost is determined as it is constant.
Change in cost per unit of output/activity is determined:
Variable cost = change in cost / change in output.
Fixed and variable costs may also be determined by using simultaneous equations.
Y = a + b(x)
where:
y = total cost
a = fixed cost
b = variable cost
x = no. of units produced.
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