C02 · Lesson 1 of 22 · 13 min · 5 hands-on tasks
Cost Behaviour
Trailhead Bikes sells $50M of bikes a year and still loses $4M. Before anyone can fix it, someone has to know how each cost moves when volume moves. Sort Trailhead's costs into fixed, variable, step and mixed, split a mixed cost with the high-low method, and see why 'cost per bike' is a moving target.
🎥 Watch it (3 min)
🎬 Situation
Larkfield Outdoor bought Trailhead Bikes for $120M. It builds three bikes in a factory in Colorado: the City commuter bike, the Trail mountain bike and the electric E-Cargo bike. Last year: $50M of sales and a $4M operating loss.
Theo has just joined as Trailhead's management accountant. Financial accounting (the last course) tells outsiders what happened. Managerial accounting is for insiders: what should we do next? Theo's first question is the simplest one: when we build more bikes, which costs go up?
🎮 Play
Spread the fixed costs. Move the volume and watch the cost of one bike change, even though no price or wage changed.
Slide the volume from 20,000 to 55,000. The variable cost never moves; the fixed cost per bike falls and falls.
Split a mixed cost. Factory power is part fixed (lights, heating, machines idling) and part variable (machines running). Use the high-low method: take the busiest and quietest months.
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- C9: slope = (high cost − low cost) ÷ (high bikes − low bikes), =(C7-C2)/(B7-B2)
- C10: fixed part = low month's cost − slope × low month's bikes, =C2-C9*B2
- C11: forecast = fixed + slope × 4,200
🏷️ Name it
| Behaviour | What it does as volume rises | Trailhead example |
|---|---|---|
| Variable | Total rises in step with units; cost per unit stays flat | Frames, wheels, batteries, assembly pay per bike: $659 a bike on average |
| Fixed | Total stays flat (within the relevant range); per unit falls | Factory rent $4M, engineers, managers: $21.7M a year in all |
| Step | Flat, then jumps in blocks | A second shift ($2M a year) past 55,000 bikes |
| Mixed | A fixed base plus a variable part | Power: $40,000 a month + $8 a bike |
The relevant range is the band of volume where these patterns hold. Trailhead's runs up to 55,000 bikes, the factory's capacity on one shift.
The high-low method: slope (variable cost per unit) = (highest-activity cost − lowest-activity cost) ÷ (highest units − lowest units). Fixed part = either month's cost − slope × its units.
🖍️ Like you're five: a birthday party has a bouncy castle ($100, however many kids come) and party bags ($3 per kid). Invite more kids and each kid's share of the castle shrinks, but every party bag still costs $3.
Real life: most companies' reports mix all costs together and divide by units, giving one "cost per unit". That number is only true at one volume. Managers who quote it for a different volume (a big order, a slow month) make the wrong call. Real cost studies use more data than two months: regression, engineering estimates and asking the people who run the machines.
🔨 Do it: 5 tasks
0 / 5 doneTask 1 of 5 · Fixed or variable?
Trailhead pays $4M a year to rent its factory. If it builds 10% more bikes next year (same factory), what's the rent?
Task 2 of 5 · Cost per bike at two volumes
Trailhead's fixed costs are $21.7M a year. What's the fixed cost per bike at 49,000 bikes? Round to the nearest dollar.
Task 3 of 5 · The high-low slope
Factory power cost $60,000 in the month Trailhead built 2,500 bikes and $80,000 in the month it built 5,000. What's the variable power cost per bike?
Task 4 of 5 · The fixed part
Using $8 a bike, what's the fixed part of the monthly power bill? (Take the low month: $60,000 at 2,500 bikes.)
Task 5 of 5 · Sort the costs
Which of these is a step cost at Trailhead?
🧩 Case: "Each bike costs us $1,102"
⭐ VIPAt Theo's first meeting, the sales director wants to win a big order from a bike-share company and asks: "What does a bike cost us?" The finance report says $1,102 per bike: $32.3M of variable costs plus $21.7M of fixed costs, divided by 49,000 bikes.
The bike-share company would add 5,000 bikes a year. What does Theo say about the $1,102?
What would you do? VIP members make the call, see what happens next across 2 decisions, and get the expert debrief.
🔁 Remember it
As volume rises (within the relevant range), fixed cost per unit...
A mobile phone plan with a $30 monthly fee plus 10 cents a minute is a...
The 'relevant range' is...
Variable costs rise with every unit; fixed costs stay put within a relevant range; step costs jump when you add a shift or a machine; mixed costs are part of each (split them with the high-low method: slope = change in cost ÷ change in units). Fixed cost per unit falls as volume rises, so never quote one 'cost per unit' without saying at what volume.
📅 Use it Monday
Pick one cost you look after (a team, a tool, a building, a cloud bill). Ask: if we did 20% more work next month, what would this cost be? Write down whether it's fixed, variable, step or mixed, and where its next step up is.
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