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# Using the high-low method, estimate R&M cost formula

Sultan Company wants to develop a cost formula (function) for its repairs and maintenance costs (R&M Costs) so it can deal with its contractors in a way that helps maximizing the Company’s return. Currently, the contractors are charging the Company a monthly flat rate of 20,000 AED plus AED 20 per labor hour. Some managers argue that labor hours are the best predictor of repair and maintenance costs. Others are claiming that machine hours are a better predictor of repair and maintenance costs. The accountant suggested collecting data about repairs and maintenance costs, number of labor hours, and number of machine hours for the last 24 months. He indicated that analyzing these data will help judge the fairness of the fees charged by the contractors.

The following table presented collected data for possible analysis: Month Machine hours labor hours R&M Costs January, 2014 29000 15000 95500 February 24000 16000 99500 March 22500 16500 89000 April 21000 14000 90000 May 20500 15500 81500 June 19500 16000 75500 July 14000 11500 70500 August 8000 7500 64500 September 12000 4000 69000 October 16500 13000 75000 November 16000 11000 71500 December 18500 12000 78000 January, 2015 21500 17000 86000 February 24000 18000 93000 March 23000 17500 93000 April 22000 17900 87000 May 20000 16700 80000 June 18000 14000 76500 July 12500 8900 67500 August 13000 9500 71000 September 15000 11000 73500 October 17000 12000 72500 November 15000 11500 71000 December 18800 13500 79000

Required: (4 marks each)

1. Using the high-low method, estimate R&M cost formula. Do the results of the high-low method cause you any concern about the current fees charged by the contractors?

2. Employ a least-square regression analysis with the relevant data points to estimate R&M cost formula using machine hours as the cost driver. Attach the print-out of your results.

3. Employ a least-square regression analysis with the relevant data points to estimate R&M cost formula using labor hours as the cost driver. Attach the print-out of your results.

4. Which regression analysis would you consider better than the other? Do the results of the regression analysis cause you any concerns about the accuracy of the high-low method??

5. Would the results of the regression analysis cause you any concerns about the current fees charged by the contractors?