Example of the High Low Method
For example the Albion Superwidget Corporation wants to quickly analyze its costs. At the level of highest activity (an output of 50,000 units) a particular cost amounted to $1,000,000, and at the level of lowest activity (output of 30,000 units) the cost was $800,000, then the variable cost would be estimated by dividing $200,000 ($1,000,000 - $800,000) by the difference in units produced, which is 20,000 units (50,000 - 30,000).
The variable cost per unit would therefore be estimated at $10. Since at an output of 50,000 units the variable cost element is $500,000 ($10 x 50,000 units), the fixed cost is found by deducting the variable costs from total costs, in other words the fixed cost is $500,000 ($1,000,000 - $500,000). This can be confirmed by looking at the lowest level of output in the period, where the variable costs are $300,000 (30,000 units x $10) and the fixed cost is again calculated to be $500,000 ($800,000 - $300,000).
The Albion Superwidget Corporation uses a marginal costing system, and will therefore use the above information to include the variable cost element in its calculation of the margin available, to cover fixed costs. This illustrates the advantages of the high low method which are its relative simplicity, speed, and ease of calculation.