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 $ 2,750 1,840 2 2,910 1,920 3 3,060 2,000 4 3,170 2,020 5 3,250 2,050 6 3,220 2,030 7 3,160 2,010 8 3,000 1,990 9 2,770 1,850 10 2,370 1,250 11 2,380 1,450 12 2,600 1,740 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

Answer:

Month       Maintenance      Machine     Equation       MAPE

                 costs                   hours          error (Abs.)

1                $2,750                1,840           $269            9.78%

2               $2,910                 1,920           $197             6.77%

3               $3,060                2,000          $135              4.41%

4               $3,170                 2,020            $47              1.48%

5               $3,250                2,050                0                 0%

6               $3,220                2,030             $8             0.25%

7               $3,160                 2,010            $46              1.46%

8               $3,000                1,990           $184             6.13%

9               $2,770                1,850           $260            9.39%

10             $2,370                1,250                  0                 0%

11              $2,380                1,450             $210           8.82%

12             $2,600                1,740            $309           11.88%

                                                                                    60.37%

variable cost per unit = (highest activity cost - lowest activity cost) / (highest activity units - lowest activity units) = ($3,250 - $2,370) / (2,050 - 1,250) = $880 / 800 units = $1.10 per unit

fixed cost = $3,250 – ($1.10 x 2,050) = $995

Cost model = $995 + $1.10X

2. Calculate the mean absolute percentage error (MAPE) for the cost equation you developed in requirement 1.

MAPE = 60.37% / 12 = 5.03%