Tom Davis runs a guiding company, Chief Adventures, based in Squamish, British Columbia, that takes customers on guided tours 12 months a year. During peak season, Davis employs up to 30 guides, all of whom are paid on an hourly basis at an average rate of $20 per hour. While there is some variation, tours are typically three hours in length. Chief Adventures has considerable fixed costs, including insurance, vehicle rentals, property taxes on its office building and warehouse, provincial licensing fees, utilities, wireless communications, administrative staff, and advertising. Each guided tour also results in variable costs, such as snacks for the customers, tour booklets, and other minor expenses. Other than the wages paid to guides, Tom has been recording all of these other fixed and variable costs as guiding expenses.
For planning purposes, Tom would like to be able to separate the variable and fixed components of guiding expenses. He thinks that the variable costs related to each guided tour are likely to be closely related to the number of customers served during a month. To begin the analysis Tom has compiled monthly data for 2014 below.
1. Prepare a scattergram that plots the number of customers on the X -axis and guiding expenses on the Y-axis. What insights are revealed by your scattergram?
2. Is it economically plausible for variable guiding expenses to be related to the number of customers? Explain.
3. Use the least-squares regression method to estimate the fixed and variable components of guiding expenses.
4. Assume that a small group of six tourists wants to go on a three-hour tour that will require two guides. What is the minimum amount Chief Adventures can charge the group to cover the variable expenses of the tour?

  • CreatedJuly 08, 2015
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