Question

Ethan Manufacturing Inc. produces floor mats for automobiles. The owner, Joseph Ethan, has asked you to assist in estimating maintenance costs. Together, you and Joseph determine that the single best cost driver for maintenance costs is machine hours. These data are from the previous fiscal year for maintenance costs and machine hours:

Month	Maintenance Costs				Machine Hours
1	$	2,640			1,730
2		2,800			1,810
3		2,950			1,890
4		3,060			1,910
5		3,140			1,940
6		3,110			1,920
7		3,050			1,900
8		2,890			1,880
9		2,660			1,740
10		2,260			1,140
11		2,270			1,340
12		2,490			1,630

Required:

1. What is the cost equation for maintenance costs using the high-low method?

2. Calculate the mean absolute percentage error (MAPE) for the cost equation you developed in requirement 1.

Answer 1

ANSWER :

1)

High-low method = ( highest cost-lowest cost / highest M H-lowest M H )

= ( 3140-2260 / 1940-1140)

= 1.1 / hour (variable cost )

FIXED COST :

2640 = A+B x ( A=fixed cost , B=variable cost per unit , x= machines hours )

2640 = A+1.1(1730)

A = 737 (fixed cost)

therefore cost equation = 737 + 1.1 x

2)

month	maintainence expenses	machine hours	forecasted value(737+1.1x)	ape %
1	2640	1730	2640	0
2	2800	1810	2728	2.5714
3	2950	1890	2816	4.5423
4	3060	1910	2838	7.2549
5	3140	1940	2871	8.5668
6	3110	1920	2849	8.3922
7	3050	1900	2827	7.3114
8	2890	1880	2805	2.9411
9	2660	1740	2651	0.3383
10	2260	1140	1991	11.9026
11	2270	1340	2211	2.5991
12	2490	1630	2530	1.6064

=58.0265

MAPE % =58.0265/12 = 4.8355