ASSIGN 10-22 Estimating a cost function, high-low method. Reisen Travel offers h
ID: 2545524 • Letter: A
Question
ASSIGN 10-22 Estimating a cost function, high-low method. Reisen Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 10 helicopters makes between 1,000 and 2,000 round-trips per year. The records indicate that a helicopter that has made 1,000 round-trips in the year incurs an average operating cost of $350 per round-trip, and one that has made 2,000 round-trips in the year incurs an average operating cost of $300 per round-trip. 1. Using the high-low method, estimate the linearrelationship y=a+bX, where yis th e total a nnual operating cost of a helicopter and X is the number of round-trips it makes to JFK airport during the year. Give examples of costs that would be included in a and in b. 2. 3. If Reisen Travel expects each helicopter to make, on average, 1,200 round-trips in the coming year, what should its estimated operating budget for the helicopter fleet be?
Explanation / Answer
1. Variable cost per round trip = b = Change in cost/Change in Number of round trip
={(2000*300)-(1000*350)}/(2000-1000)
= $250 per day
Fixed cost per round trip = a = Total cost at 1000 round trip - Variable cost at 1000 round trip
= (350*1000)-(250*1000)
= $ 1,00,000/-
Required Linear Relationship Y= $1,00,000+ $250*x
2. Examples of cost includible in a = Cabin Crew salary, Pilot Salary, License fees, Aircraft rentals, etc
Examples of cost includibles in b = Fuel cost, Pantry Items, etc
3. Estimating operating budget for helicopter fleet for upcoming year
= 1200 trips cost for each helicopter* 10 Helicopters
= [($ 1,00,000) + ($ 250*1200 )]*10
= $ 40,00,000/-