Accounting

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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.

  • Accounting -

    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

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