Question

Roche Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 14 helicopters makes between 1,200 and 2,400 round-trips per year. The records indicate that a helicopter that has made 1,200 round-trips in the year incurs an average operating cost of $535 per round-trip, and one that has made 2,400 round-trips in the year incurs an average operating cost of $500 per round-trip. i Requirements 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. 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 Roche Travel expects each helicopter to make, on average, 1,800 round-trips in the coming year, what should its estimated operating budget for the helicopter fleet be? Print Done

Answer 1

Using high low method, variable cost per trip = difference in total cost/difference in number of trips

=(2400*500-1200*535)/(2400-1200)

=$465 per trip

Fixed cost = total cost- variable cost

=2400*(500-465)

=$84000

Hence, the equation is Y = 84000 +465x

A I.e. fixed costs will include depreciation, rent of storage place etc

B I.e. variable costs will included fuel per trip, cost of staff paid per trip etc.

Budget =1800*465*14+84000*14

=$12,894,000