Slope coefficient =
$5, 400 $4,000
= 10,000 6,000
$1, 400
= 4, 000 = $0.35 per machine-hour
Constant = Total cost (Slope coefficient Quantity of cost driver)
= $5,400 ($0.35 10,000) = $1,900
= $4,000 ($0.35 6,000) = $1,900
Variable costs:
$260,000
2.
$412,000
Variable costs per car = 80,000 = $5.15 per car
Total costs estimated for 90,000 cars = $110,000 + ($5.15 90,000) = $573,500
Number of
Customer-Service
Service Reports Department Costs
Highest observation of cost driver
455
$21,500
Lowest observation of cost driver
115
13,000
Difference
340
$ 8,500
Customer-service department costs = a + b (number of service reports)
$8,500
= 340 = $25 per service report
= $21,500 ($25 455) = $10,125
= $13,000 ($25 115) = $10,125
3.
$25,000
$20,000
$15,000
Customer-Service Department Costs
$10,000
$5,000
$0
0
Machine-Hours
Highest observation of cost driver
Lowest observation of cost driver
Difference
Maintenance costs
Maintenance Costs
140,000
95,000
45,000
$280,000
190,000
$ 90,000
= a + b Machine-hours
$90,000
Slope coefficient (b) = 45,000 = $2 per machine-hour
Constant (a)
or
Constant (a)
Maintenance costs
= $2 Machine-hours
2.
SOLUTION EXHIBIT 10-31
Plot and High-Low Line of Maintenance Costs as a Function of Machine-Hours
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
90,000 100,000 110,000 120,000 130,000 140,000 150,000
Economic plausibility. The cost function shows a positive economically plausible relationship
between machine-hours and maintenance costs. There is a clear-cut engineering relationship
of higher machine-hours and maintenance costs.
Goodness of fit. The high-low line appears to fit the data well. The vertical differences
between the actual and predicted costs appear to be quite small.
Slope of high-low line. The slope of the line appears to be reasonably steep indicating that, on
average, maintenance costs in a quarter vary with machine-hours used.
3.
Using the cost function estimated in 1, predicted maintenance costs would be $2
100,000 = $200,000.
Howard should budget $200,000 in quarter 13 because the relationship between
machine-hours and maintenance costs in Solution 10-31 is economically plausible, has an
excellent goodness of fit, and indicates that an increase in machine-hours in a quarter causes
maintenance costs to increase in the quarter.