Question

Bay Co. has accumulated data to use in preparing its annual profit plan for the upcoming year. The cost behavior pattern of the maintenance costs must be determined. Data regarding the machine hours and maintenance costs for the last year are as follows:

Month	Maintenance Cost ($)	Machine Hours
Jan.	5040	620
Feb.	3600	420
Mar.	4320	520
Apr.	3380	390
May	5220	650
June	3550	400
July	3640	430
Aug.	5360	680
Sept.	5110	640
Oct.	4860	610
Nov.	3960	460
Dec.	3790	440
Sum	$51830	6260
Average	$4319	522

Required:

a) Estimate the cost function using the high-low method. Cost Function: ____________________________________

b) Estimate the maintenance expense for a month that the firm expects to operate 600 machine hours (round to nearest whole dollar)? $____________________________________

c) Evaluate 2 measures for precision and 2 measures of reliability of the regression model:

a. Precision: ____________________________________

____________________________________

b. Reliability: ____________________________________

____________________________________

Answer 1

From above high and low cost is as follows:

Month	Maintenance Cost	Machine Hours
Apr.	3,380.00	390.00
Aug.	5,360.00	680.00

Variable Cost Per Unit = Differnce of High-Low Cost / Difference of Machine Hours

= (5360-3380) / (680-390)

= 6.83 Per Mach Hour

Fixed Cost = Total Cost - Variable Cost
Fixed Cost = 5360 - (680 x 6.83)

= 5360-4644.40

= $715.60

Approx fixed cost = $ 716

The relationship between machine hours and maintenance cost is y = 715.60 + 6.83(x)

The maintenance expense for a month that the firm expects to operate 600 machine hours  

= 715.60 + (6.83*600)

= $ 4,813.60