La Mia's Casas builds replicas of residences of famous and infamous people. The company is highly automated, and the new accountant-owner has decided to use machine hours as the basis for predicting maintenance costs. The following data are available from the company's most recent eight months of operations:
Machine Hours Maintenance Costs
4,000 ..................$1,470
7,000 .................. 1,200
3,500 .................. 1,680
6,000 .................. 1,100
3,000 .................. 1,960
9,000 .................. 880
8,000 .................. 1,020
5,500 .................. 1,200
a. Using the high-low method, determine the cost formula for maintenance costs with machine hours as the basis for estimation.
b. What aspect of the estimated equation is bothersome? Provide an explanation for this situation.
c. Within the relevant range, can the formula be reliably used to predict maintenance costs? Can the a and b values in the cost formula be interpreted as fixed and variable costs? Why or why not?