estimatingacostfunctionhighlowmethod 1 see solut ion

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Unformatted text preview: operating cost of a helicopter and X represents the number of round trips it makes annually. 2. The constant a (estimated as $100,000) represents the fixed costs of operating a helicopter, irrespect ive o f the number o f round trips it makes. This would include items such as insurance, registration, depreciat ion on the aircraft, and any fixed co mponent of pilot and crew salaries. The coefficient b (est imated as $250 per round­trip) represents the variable cost of each round trip—costs that are incurred only when a helicopter actually flies a round trip. The coefficient b may include costs such as landing fees, fuel, refreshments, baggage handling, and any regulatory fees paid on a per­flight basis. 3. If each helicopter is, on average, expected to make 1,200 round trips a year, we can use the estimated relationship to calculate the expected annual operating cost per helicopter: Y = $100,000 + $250 X X = 1,200 Y = $100,000 + $250 ´ 1,200 = $100,000 + $300,000 = $400,000 Wit h 10 helicopters in its fleet, Reisen’s est imated operating budget is 10 ´ $400,000 = $4,000,000. 10­9 10­24 (20 min.) Estimating a cost function, high­low method. 1. See Solut ion Exhibit 10­24. There is a posit ive relat ionship between the number o f service reports (a cost driver) and the customer­service depart ment costs. This relat ionship is economically plausible. 2. Number of Customer­Service Service Reports Department Costs Highest observat ion of cost driver 436 $21,890 Lowest observat ion of cost driver 122 12,941 Difference 314 $ 8,949 Customer­service department costs = a + b (number of service reports) $8, 949 = $28.50 per service report 314 Constant (a) = $21,890 – $28.50 ´ 436 = $9,464 = $12,941 – $28.50 ´ 122 = $9,464 Customer­service = $9,464 + $28.50 (number of service reports) department costs Slopecoefficient (b) = 3. Other possible cost drivers of customer­service department costs are: a. Number o f products replaced wit h a new product (and the do llar value o f the new products charged to the customer­service department). b. Number of products repaired and the time and cost of repairs. SOLUTION EXHIBIT 10­24 Plot of Number of Service Reports versus Customer­Service Dept. Costs for Capitol Products Customer­Service Department Cost s $25,000 20,000 15,000 10,000 5,000 $0 0 100 200 300 400 500 Number o...
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