Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 33

Cost Estimation: High-Low Method; MAPE Horton Manufacturing Inc. produces blinds and other window treatments for residential homes and offices. The owner is concerned about the maintenance costs for the production machinery, as maintenance costs for the previous fiscal year were higher than he expected. The owner has asked you to assist in estimating future maintenance costs to better predict the firm’s profitability. Together, you have determined that the best cost driver for maintenance costs is machine-hours. The data from the previous fiscal year for maintenance expense and machine- hours follows:

Month	Expense	Hours	Month	Expense	Hours
1	$2,625	1,499	7	$2,865	1,785
2	2,670	1,590	8	2,905	1,805
3	2,720	1,605	9	2,780	1,695
4	2,822	1,655	10	2,570	1,410
5	2,855	1,775	11	2,590	1,550
6	3,005	1,880	12	2,890	1,405

Required

1. What is the cost equation for maintenance cost using the high-low method? Graph the data points to check for outliers.

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2. Calculate MAPE for the cost equation you developed in part 1.

Step 1 of 6

1.

In order to prepare a cost equation for maintenance cost, the variable maintenance cost per operating hour and the fixed maintenance cost per month will have to be determined first.

Compute variable maintenance cost per operating hour using high-low method as follows: