Question

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 because 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 costs and machine hours follow:

Month	Maintenance Costs				Machine Hours
1	$	2,625			1,499
2		2,670			1,590
3		2,720			1,605
4		2,820			1,655
5		2,855			1,775
6		3,005			1,880
7		2,865			1,785
8		2,905			1,805
9		2,780			1,695
10		2,570			1,410
11		2,590			1,550
12		2,890			1,425

Required:

1. Use the high-low method to estimate the fixed and variable portions for maintenance costs. (In your calculations, round "slope (unit variable cost)" to 4 decimal places. Enter the "slope (unit variable cost)" rounded to 4 decimal places and and all other calculations, to nearest whole dollar.)

Maintenance Cost= BLANK + (BLANK X BLANK)

Answer 1

Here, the high level of activity was in the 6th month when 1,880 machine hours were used and the low level of activity was in the 10th month when 1,410 machine hours were used.

	Maintenance cost	Machine hours
High level of activity	$3,005	1,880
Less : Low level of activity	( 2,570 )	( 1,410 )
Difference	$435	470

Variable cost per unit = Difference in maintenance cost / Difference in Machine hours = $435 / 470 machine hours = $0.9255 per machine hour

Now let us calculate the fixed maintenance cost by using the data of high level of activity :

Total maintenance cost = Total variable maintenance cost + Total fixed maintenance cost

$3,005 = ( $1,880 machine hours * $0.9255 ) + Total fixed maintenance cost

$3,005 = $1,740 + Total fixed maintenance cost

Total fixed maintenance cost = $1,265

So, the equation of maintenance cost would be as follows :

Maintenace cost = $1,265 + ( X * $0.9255 )

Here, X refers to the number of machine hours used.