Texpedia provides travel services on the Internet. In the first quarter of 2016, Texpedia reported an...
Texpedia provides travel services on the Internet. In the first quarter of 2016, Texpedia reported an operating income of $5.3 million on sales revenue of $62 million. In the second quarter of 2016, sales revenue had increased to $68 million, and Texpedia had an operating income of $9.2 million. Assume that Texpedia’s costs had followed the same linear cost function, Total costs = Fixed costs + (Variable costs per Revenue $ x Total Revenue) in both quarters and that Texpedia was operating within the relevant range of this cost function.
1. Estimate Texpedia’s cost function using the data provided
2. Use the cost function you estimated to forecast Texpedia’s third quarter 2016 costs and operating income based on a sales revenue prediction of $70 million.
Homework Answers
Cost = Sales - Operating Income
Variable cost per Dollar of Revenue = Difference in Cost/Difference In Revenues
= (58.8 million - 56.7 million)/(68 million - 62 million)
= $0.35 per Dollar of Revenue
Fixed costs = Total cost - variable cost
= 58.8 million - 68 million*0.35
= $35 million
Hence, Total cost function = $35 million + 0.35*Per Dollar of Revenue
2.Total cost = 35 million + 0.35*70 million
= $59.5 million
Operating Income = 70 million - 59.5 = $10.5 million
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