The high-low methodology is a value accounting method used to separate mounted and variable prices given a restricted quantity of knowledge. By evaluating the whole prices on the highest and lowest ranges of exercise inside a related vary, it estimates the variable price per unit and the whole mounted prices. For instance, if an organization incurs $10,000 in complete prices at its lowest exercise stage of 1,000 items and $15,000 in complete prices at its highest exercise stage of two,000 items, the variable price per unit is calculated as ($15,000 – $10,000) / (2,000 – 1,000) = $5. The mounted price part can then be derived by subtracting the whole variable price (variable price per unit multiplied by both the excessive or low exercise stage) from the whole price at that exercise stage.
This strategy offers an easy method to perceive price conduct and develop price estimations, particularly when detailed price info is unavailable or impractical to assemble. Whereas not as correct as regression evaluation, its simplicity permits for fast price projections and budgeting selections. Its improvement predates refined computerized evaluation and stems from a necessity for accessible price estimation instruments. Traditionally, companies have utilized this methodology to achieve a primary understanding of their price construction with out requiring complicated calculations.
