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	$	2,720			1,974
2		2,767			2,094
3		2,819			2,114
4		2,925			2,180
5		2,959			2,338
6		3,114			2,476
7		2,969			2,351
8		3,010			2,377
9		2,880			2,232
10		2,662			1,857
11		2,683			2,041
12		2,994			1,876

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 all other calculations, to nearest whole dollar.)

2. Graph the data points to check for possible outliers and determine whether the points selected in requirement 1 are representative of the data. (To earn full credit for this graph you must plot all required points for each curve. While plotting the points a tool icon will pop up. You can use this to enter exact co-ordinates for your points as needed.)

3. Calculate the mean absolute percentage error (MAPE) for the cost equation you developed in requirement 1. (Do not round intermediate calculations, with the exception of MAPE for each month, which should be rounded to three decimal places. Input your final answer as a percentage rounded to 1 decimal place (i.e., .0540 = 5.40%).)

Answer 1

1)
Cost equation= Fixed cost + Variable cost x Unit activity
High Low method
Step 1		Machine Hours	Maintenance Costs
High Month	6	2,476	$   3,114.00
Low Month	10	1,857	$   2,662.00
Difference		619	452
Step - 2 Variable cost per Machine hour = $452//619	$         0.7302
Fixed Cost
6th month = $3114 - (2476 x .7302)	$ 1,306.0000
10th month = E2662 -(1857 x $7302)	$ 1,306.0000
Step -3 Fixed Cost per month	$ 1,306.0000
Cost = $1306 + $0.7302 x Machine hours
2)
The graph representative of high-low method , there is one significant outliner in the 12th month.
3)
Month	Machine Hours	Actual Maintenance Costs	Estimated Maintence Cost = $1306 + $0.7302 x Machine hours	MAPE = Abs(actual - estimate)/actual
1	1,974	$ 2,720.00	$   2,747.43	1.009%
2	2,094	$ 2,767.00	$   2,835.06	2.460%
3	2,114	$ 2,819.00	$   2,849.66	1.088%
4	2,180	$ 2,925.00	$   2,897.86	0.928%
5	2,338	$ 2,959.00	$   3,013.23	1.833%
6	2,476	$ 3,114.00	$   3,114.00	0.000%
7	2,351	$ 2,969.00	$   3,022.72	1.809%
8	2,377	$ 3,010.00	$   3,041.71	1.053%
9	2,232	$ 2,880.00	$   2,935.83	1.938%
10	1,857	$ 2,662.00	$   2,662.00	0.000%
11	2,041	$ 2,683.00	$   2,796.36	4.225%
12	1,876	$ 2,994.00	$   2,675.87	10.625%
MAPE = 3.86%