Reference no: EM133239675
Zoom Zoom Travel offers helicopter service from Canberra to Batemans Bay. Each of its 10 helicopters makes between 1000 and 2000 round trips per year. The records indicate that a helicopter that made 1000 round trips in the year incurs an average operating cost of $450 per round trip, and one that has made 2000 round trips in the year incurs an average operating cost of $400 per round trip. The following table provides Zoom Zoom Travel's annual trip and cost data.
Annual Round Trips (1)
Operating Cost per Round Trip (2)
Annual Operating Cost (3) = (1) x (2)
2000
$400
$800 000
1000
$450
$450 000
In addition to using high-low method for estimating annual operating cost, Zoom Zoom Travel's Management Accountant also uses annual data from past years to estimate annual operating cost using regression analysis and has obtained the regression line as y = $110 000 + $230X with Annual Operating Cost as the dependent variable and Annual Round Trips as the independent variable. The R2 value of the regression line is 0.9661.
Required:
(a) Using the high-low method, estimate the linear relationship y = a + bX, y is the total annual operating cost of a helicopter and X is the number of round trips it makes to Batemans Bay during the year.
(b) If Zoom Zoom Travel expects each helicopter to make, on average, 1200 round trips in the coming year, using the above high-low cost function calculate what should the estimated operating cost budget for the 10 helicopters?
(c) Use the regression line to calculate the cost of 1200 round trips.
(d) Evaluate Zoom Zoom Travel's regression line using the criteria of Goodness of Fit.
(e) Will high and low point method of estimating annual operating cost or regression method provide accurate estimate of Canberra-Batemans Bay round trips cost of Zoom Zoom Travel? Explain.