The high-low method is one of the simplest ways to separate fixed and variable costs, using just two data points: your highest and lowest levels of activity.
What it is
Fixed costs stay constant no matter what you produce - rent, salaries, insurance. Variable costs move with activity, like raw materials or hourly wages. The method compares the total cost at the busiest period with the total cost at the quietest one to estimate how costs behave. It is ideal when you want a fast, preliminary estimate without regression analysis or software.
How it works
Identify the highest and lowest activity levels and their total costs, then find the variable cost per unit from the change between them. For example, a coffee roaster spends $45,000 to roast 10,000 lbs and $27,000 to roast 4,000 lbs. That works out to $3.00 in variable cost per pound and $15,000 in fixed costs. From there, roasting 12,000 lbs would cost about $51,000.
Strengths and limits
- Simple and fast - only two data points needed
- No software required; great for budgeting and break-even planning
- But it can mislead if those two points are outliers
- It ignores cause-and-effect, unlike least-squares regression
The fee factor
One cost that quietly inflates a high-low analysis is credit card processing. At 3% or more per transaction, fees push totals higher across the board. Cashswipe's Cash Discount Program passes that fee to card-paying customers, so a business keeps more margin - and the agent who sets it up earns about 1 percent of processing volume in monthly residuals.