Question

Resling Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 9 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.

Required:
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?

Answer 1

1. y = $255 + $0.15 X

2. Examples of costs that would be included in a and in b.

a - Fixed Cost

Example : Maintenance Cost over the period

b - Variable Cost

Example : Maintenance Cost after every flight

3. $435

Step-by-step explanation:

linear relationship

Fist determine the high point and the low point

High : 2,300 ​round-trips

Low : 1,300 ​round-trips

Then determine the variable cost

Variable Cost = Difference between Overheads ÷ Deference in Independent variables

= ($600 - $450) ÷ (2,300 - 1,300)

= $0.15 per round-trip

Determine the fixed cost element

Fixed Cost = Total Overheads - Variable cost at a point

Choosing the Highest point this will be :

Fixed Cost = $600 - $0.15 × 2,300

= $255

Then the linear relationship y =a + bX will be : y = $255 + $0.15 X

Examples of costs that would be included in a and in b.

a - Fixed Cost

Maintenance Cost over the period

b - Variable Cost

Maintenance Cost after every flight

Operating budget for the helicopter fleet with 1,200 round-trips in the coming year

y = $255 + $0.15 X

= $255 + $0.15 × (1,200)

= $435