How to Analyze Mixed Costs

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  • 0:02 What Is Mixed Cost?
  • 0:59 Breaking Down Mixed Cost
  • 3:03 Another Example
  • 3:45 Calculating Mixed Cost
  • 4:46 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we'll explore costs. We'll learn about fixed and variable costs, and we'll revolve our lesson around mixed costs. Finally, we'll look at some examples and learn how mixed costs are calculated.

What Is Mixed Cost?

Meet Ryan. Ryan owns his own business, Stamps and Ink, where he creates custom stamps for businesses. Ryan normally has an accountant that handles all of his finances, but for the last two weeks, that accountant has been at home sick. Because the financial aspects of the business still need to be tended to, Ryan decides to do the calculations and complete the books himself.

He begins by looking at all of the different costs of his business. For example, he has the cost of the machines he rents to make the stamps, the boxes needed to ship the stamps, and the mortgage payment for the building. But Ryan quickly becomes overwhelmed because he's not sure where to place each cost. Which ones stay the same? Which ones change? And which ones are mixed costs, which combine both fixed and variable costs? In this lesson, we will learn more about mixed costs and how to calculate them.

Breaking Down Mixed Cost

As we now know, a mixed cost is made up of fixed and variable costs. Let's look at these in more detail. Fixed costs are those costs that stay the same regardless of production. In other words, a fixed cost does not change no matter how many goods or services a company ends up producing.

For example, the mortgage payment for the building where Ryan operates his business is a fixed cost. Whether he makes 5 stamps or 5000 stamps, Ryan still has to pay the same mortgage payment each month.

On the other hand, variable costs are those costs that change based on production. As the number of products a company makes increases, the costs increase as well. If the number of products produced decreases, the costs also decrease.

An example of a variable cost might be the cost of the boxes Ryan needs to mail the stamps. If Ryan makes 100 cases of stamps, he will need 100 boxes to mail out those stamps. If Ryan only makes two cases of stamps, he will only need two boxes. Obviously, the more stamps Ryan makes, the more boxes he will need. The more boxes he needs, the more money it will cost to purchase those boxes. The same can be said as production decreases. Fewer stamps means fewer boxes and lower costs.

So, when we combine both types of costs, fixed and variable, we have mixed cost. In other words, a mixed cost has two components, a fixed component that does not change, and a variable component that changes in relation to production.

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