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 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 $300 per round-trip, and one that has made 2,000
round-trips in the year incurs an average operating cost of $250 per round-trip.
1. Using the high-low 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 round-trips 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 round-trips 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 Reisen’s operating budget.

1. Using the high-low 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 round-trips 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

To estimate the linear relationship between the total annual operating cost of a helicopter and the number of round-trips it makes to JFK airport, we can use the high-low method. This method involves using the data points with the highest and lowest activity levels to estimate the cost function.

1. To estimate the linear equation y = a + bX, where y is the total annual operating cost and X is the number of round-trips, follow these steps:

Step 1: Identify the high and low data points (round-trips and operating costs).
In this case, the high data point is 2,000 round-trips with an operating cost of $250, and the low data point is 1,000 round-trips with an operating cost of $300.

Step 2: Calculate the slope (b).
The slope (b) represents the change in the operating cost per unit change in the number of round-trips. To calculate b, subtract the low operating cost from the high operating cost and divide it by the difference in round-trips:
b = (250 - 300) / (2000 - 1000) = -0.05

Step 3: Calculate the intercept (a).
The intercept (a) represents the fixed portion of the operating cost. To calculate a, subtract the slope (b) multiplied by the round-trips from either the high or low operating cost value (the choice doesn't matter since it's a straight line):
a = 300 - (-0.05 * 1000) = 300 + 50 = 350

Therefore, the estimated linear equation is y = 350 - 0.05X.

2. The cost function y = a + bX breaks down as:
- a represents the fixed costs or costs that do not vary with the number of round-trips, such as the base maintenance costs, insurance, and administrative expenses.
- b represents the variable cost per unit of activity, in this case, the variable operating costs per round-trip, such as fuel, pilot wages, and maintenance per round-trip.

3. To estimate the operating budget for the helicopter fleet, we need to calculate the total operating cost for the given number of round-trips (1,200 in this case) using the estimated linear equation.

Operating cost (y) = 350 - 0.05 * 1,200
Operating cost (y) = 350 - 60
Operating cost (y) = 290

Therefore, the estimated operating budget for the helicopter fleet would be $290 per helicopter for the year.

To determine the most important cost driver in estimating cost functions for Reisen Travel, we need to analyze the cost behavior and its relationship with the activity levels. The cost driver is the factor that has the most significant influence on the total cost.

In this case, the cost driver could be the number of round-trips made by the helicopters. As the number of round-trips increases, the operating costs decrease per round-trip. This indicates that economies of scale come into play, where the cost per round-trip reduces as the activity level increases.

Identifying the cost driver is crucial because it allows Reisen Travel to focus their cost management efforts on controlling and optimizing the factor that has the most substantial impact on their operating budget. So, by maximizing the number of round-trips, Reisen Travel can reduce the average operating cost per round-trip and, as a result, improve their overall operating budget.