Expedia provides travel services on the Internet. The year 2002 was important for Expedia because it reported positive operating income after three years of operating losses. In the first quarter of 2001, Expedia reported an operating loss of $19 million on sales revenue of $57 million. In the first quarter of 2002, sales revenue had more than doubled to $116 million, and Expedia had operating income of $18 million. Assume that fixed costs were the same in 2002 as in 2001.

1. Compute the operating expenses for Expedia in the first quarter of 2001, and in the first quarter of 2002.

2. Use the high-low method to estimate the cost function for Expedia.

Use sales revenue as your cost driver (X). Your estimate of V in the cost function, the variable cost, will be the variable cost as a percentage of sales revenue. Obtain this by dividing the change in operating expenses by the change in total revenue.

3. Explain how Expedia’s operating income could increase by $37 million with an increase in sales of $59 million, while it had an operating loss of $19 million on its $57 million of sales in the first quarter of 2001.