wk 4 Budgets for Managers.docx - Chapter 8 8-27 8-29 8-31...

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Chapter 8: 8-27, 8-29, 8-31, 8-35. Chapter 9: 9-43.8-27Estimating Costs in an Uncertain EnvironmentMany companies face increasingly unpredictable costs and revenues as the recession affects demand for products and the costs of materials and labor for these products. Revenues and costs have fluctuated significantly in recent years for such cost elements as fuel, labor, commodities (agricultural commodities, metals, etc.), interest, and rent expense, among others. Dealing with the increased fluctuations requires cost estimation methods that are more sophisticated and more frequently updated. The result is that companies are including in their cost estimation additional independent variables. Moreover, these companies are updating their estimation models more frequently. For example, Southwest Airlines updates its revenue prediction model on a daily basis. Required:Consider Southwest Airlines and the following six key areas of cost for the company. Which of these costs do you think the airline must update most frequently? Flight crew. Fuel costs. Maintenance spending. Advertising spending. Aircraft ownership costs.In considering the airline business I would think the cost that they have the least control over would be fuel costs. Petroleum which is used to make fuel, is a volatile market that experiences many fluctuations in pricing. Since the fuel pricing depends on this volatile market and can experience rapid changes, this the cost that Southwest Airline must update frequently.

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