Problem: High-low method.
Ken Howard, financial analyst at KMW Corporation, is examining the behavior of quarterly maintenance costs for budgeting purposes. Howard collects the following data on machine-hours worked and maintenance costs for the past 12 quarters:
|
Quarter
|
Machine-Hours
|
Maintenance Costs
|
|
1
|
100,000
|
$205,000
|
|
2
|
120,000
|
240,000
|
|
3
|
110,000
|
220,000
|
|
4
|
130,000
|
260,000
|
|
5
|
95,000
|
190,000
|
|
6
|
115,000
|
235,000
|
|
7
|
105,000
|
215,000
|
|
8
|
125,000
|
255,000
|
|
9
|
105,000
|
210,000
|
|
10
|
125,000
|
245,000
|
|
11
|
115,000
|
200,000
|
|
12
|
140,000
|
280,000
|
1. Estimate the cost function for the quarterly data using the high-low method.
2. Plot and comment on the estimated cost function.
3. Howard anticipates that KMW will operate machines for 100,000 hours in quarter 13. Calculate the predicted maintenance costs in quarter 13 using the cost function estimated in requirement 1.