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 $ 2,680 1,770 2 2,840 1,850 3 2,990 1,930 4 3,100 1,950 5 3,180 1,980 6 3,150 1,960 7 3,090 1,940 8 2,930 1,920 9 2,700 1,780 10 2,300 1,180 11 2,310 1,380 12 2,530 1,670 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

Sl. No.	Maintenance cost	Machine Hours
1	$2,680	1,770
2	$2,840	1,850
3	$2,990	1,930
4	$3,100	1,950
5	$3,180	1,980
6	$3,150	1,960
7	$3,090	1,940
8	$2,930	1,920
9	$2,700	1,780
10	$2,300	1,180
11	$2,310	1,380
12	$2,530	1,670
		Machine Hours	Maintenance cost
	High level of activity	1,980	$3,180
	Low level of activity	1,180	$2,300
	Change	800	$880
	Variable cost	$1.10	per machine hour		(880/800)
	Fixed Cost =	3,180 - 1,980*1.10
		3,180 - 2,178
		$1,002
	Equation =	$1,002 + 1.10y
	where y = machine hour
Sl. No.	Machine Hours	Maintenance cost(Actual)	Hilo Estimate		MAPE
1	1,770	$2,680	$2,949	$1,002+1.1*1770	10.04%	abs(2680-2949)/2680
2	1,850	$2,840	$3,037	$1,002+1.1*1850	6.94%	abs(2840-3037)/2840
3	1,930	$2,990	$3,125	$1,002+1.1*1930	4.52%	abs(2990-3125)/2990
4	1,950	$3,100	$3,147	$1,002+1.1*1950	1.52%	abs(3100-3147)/3100
5	1,980	$3,180	$3,180	$1,002+1.1*1980	0.00%	abs(3180-3180)/3180
6	1,960	$3,150	$3,158	$1,002+1.1*1960	0.25%	abs(3150-3158)/3150
7	1,940	$3,090	$3,136	$1,002+1.1*1940	1.49%	abs(3090-3136)/3090
8	1,920	$2,930	$3,114	$1,002+1.1*1920	6.28%	abs(2930-3114)/2930
9	1,780	$2,700	$2,960	$1,002+1.1*1780	9.63%	abs(2700-2960)/2700
10	1,180	$2,300	$2,300	$1,002+1.1*1180	0.00%	abs(2300-2300)/2300
11	1,380	$2,310	$2,520	$1,002+1.1*1380	9.09%	abs(2310-2520)/2310
12	1,670	$2,530	$2,839	$1,002+1.1*1670	12.21%	abs(2530-2839)/2530
				Average =	5.16%
	Hence, MAPE = 5.16%

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