e10-22 Resling Travel offers helicopter service from suburban towns to John F. K
ID: 2592805 • Letter: E
Question
e10-22
Resling Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 77 helicopters makes between 1,300 and 2,300 round-trips per year. The records indicate that a helicopter that has made 1,300 round-trips in the year incurs an average operating cost of $600 per round-trip, and one that has made 2,300 round-trips in the year incurs an average operating cost of $450 per round-trip.
Requirements: 1. Using the high-low method, estimate the linear relationship y equals 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 Resling 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
Solution 1:
Computation of variable operating cost per round trip and fixed cost using high low method:
Highest number of round trip for a helicopter in a year = 2300 round trip, with operating cost = $450 per round trip
Total operating cost at highest round trip = 2300 * 450 = $1,035,000
Lowest number of round trip for a helicopter in a year = 1300 round trip, with operating cost = $600 per round trip
Total operating cost at lowest round trip = 1300 * 600 = $780,000
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.
Therefore:
a + 2300b = $1,035,000
a + 1300b = $780,000
On solving both equations:
b = ($1,035,000 - $780,000) / (2300 – 1300) = $255 per round trip
a = $1,035,000 – (2300*255) = $448,500
Linear relationship considering y is the total cost at x number of round trip:
y = $448,500 + $255b
Solution 2:
a is the fixed cost of operating helicopter, example of costs are depreciation on helicopter, staff salary etc. b is the variable cost of helicopter per round trip. Example of costs are fuel cost, transit insurance etc.
Solution 3:
Estimated number of round trips in upcoming year = 1700
Estimated operating cost for each helicopter = $448,500 + 1700*255 = $882,000 per helicopter
Estimate operating budget of helicopter fleet = $882,000 * 77 = $67,914,000
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