Accounting
posted by ACC Help on .
I am not even sure where to get started on this.
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 roundtrips per year. The records indicate that a helicopter that has made 1,000 roundtrips in the year incurs an average operating cost of $300 per roundtrip, and one that has made 2,000
roundtrips in the year incurs an average operating cost of $250 per roundtrip.
1. Using the highlow method, estimate the linear relationship y = a + bX, where y is the total annual operating cost of a helicopter and X is the number of roundtrips it makes to JFK airport during the year.
2. Give examples of costs that would be included in a and in b.
3. If Reisen Travel expects each helicopter to make, on average, 1,200 roundtrips in the coming year, what should its estimated operating budget for the helicopter fleet be?
How would you determine the most important cost driver when estimating cost functions in the case of Reisen Travel? Identify the cost driver and how it would impact Reisenâ€™s operating budget.

1. Using the highlow method, estimate the linear relationship y = a + bX, where y is the total annual operating cost of a helicopter and X is the number of roundtrips it makes to JFK airport during the year.
When x = 1000, y = $300*1000 = $300,000
When x = 2000, y = $250*2000 = $500,000
The variable cost is = b
To find the fixed cost, substituting in y = a + bX
$300,000 = a + $200*1000
$300,000 = a + $200,000
or, a = $300,000  $200,000 = $100,000
Therefore, the linear relationship is: y = 100,000 + 200x