Ramone Travel offers helicopter service from suburban towns to John F. Kennedy I
ID: 2523486 • Letter: R
Question
Ramone Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City Each of its 15 helicopters makes between 1,350 and 2,100 round-trips per year. The records indicate that a helicopter that has made 1,350 round-trips in the year incurs an average operating cost of $450 per round-trip, and one that has made 2.100 round-trips in the year incurs an average operating cost of $350 per round-trip. 3. Read the requirements Requirement 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. y$378,000$170 Requirement 2. Give examples of costs that would be included in a and in b. Begin by selecting which type of costs "a" and "b" represent, then select the costs that correlate with that cost type, use each cost only once. Fixed costs Variable costs Depreciation Insurance Salaries Baggage handling Fuel Landing fees Requirement 3. If Ramone Travel expects each helicopter to make, on average, 1,700 round-trips in the coming year, what should its estimated operating budget for the helicopter fleet be? Ramone Travel's estimated operating budget for all 15 helicopters in the fleet combined should be $ 10,005,000 1: Requirements 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 Ramone Travel expects each helicopter to make, on average, 1,700 round-trips in the coming year, what should its estimated operating budget for the helicopter fleet be?Explanation / Answer
The question has been solved using the equation written for Total Cost calculation.
Remember that Total Cost is Sum of Variable Cost + Fixed Cost.
Here Y= Total Cost
A= Fixed Cost
bX= Total Variable Cost
To make the equation, we need fixed and variable component.
For the computation of the same, we see Two scenarios has been given in question which can help us to calculate the variable portion per trip and fixed portion.
Total Operating Cost for 1350 round trips = 1350 * 450 = $607,500
Total Operating Cost for 2100 round trips = 2100* 350 = $737,500
Variable cost per Trip = Change in Total Operating Cost / Change in number of Trips
= 737,500 – 607,500 / (2100 – 1350)
= $170 per round trip
Please note that when we calculate Change in Total Operating Cost; we automatically ignore the Fixed cost.
Change in Total Operating cost can be read as: Variable Cost 1350 rounds + Fixed Cost 2100 rounds – variable cost 1350 rounds – Fixed cost 1350 rounds. Since Fixed cost will remain same, it will be automatically eliminated.
Now, Fixed cost is easy to compute:
Total Operating Cost for 1350 round trips = $607,500
Total Variable Cost for 1350 round trips = $1350 * 170 = $229,500
Fixed Cost= Total Cost – Variable cost= 378,000
Now, Equation will look like Y= 378,000 + $170 X
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