Question

8-36 Cost estimation: Ethan Manufacturig Inc. produces floor mats for automobiles. Joseph Ethan has asked you to assit 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 expense and machine hours.

Month Maitenance expense Machine hours

1 2,600 1,690

2 2,760 1,770

3 2,910 1,850

4 3,020 1,870

5 3,100 1,900

6 3,070 1,880

7 3,010 1,860

8 2,850 1,840

9 2,620 1,700

10 2,220 1,100

11 2,230 1,300

12 2,450 1,590

Requirment 1: what is the cost equation for maintenance using the high-low method? Graph the data points to check for outliners, alos do the single linear regression chart method and the caclulation method using the data Analysis tool in excel

Please attach answers as an excel doc attchment that is viewable!

Answer 1

Step 1: Select the activity with the highest and lowest amounts
Highest Machine Hrs worked		1,900
Lowest Machine Hrs worked		1,100
Step 2: Select the costs adjacent to those activities: 3,100 and 2,220
Step 3: Determine the slope (the variable cost per unit):
	[3100-2220]/[1900-1100] = 1.10
Step 4: Plug the variable cost from step 3 and the activity (Machine Hours) and total cost from either the high or the low point into the total cost equation, to solve for fixed costs (FC):
	Total Cost = Variable Cost x Activity + Fixed cost
	3100 = 1.10*1900 + Fixed Cost
	Fixed Cost = 1010
Cost Equation = 1.10x + 1010