Case 1: Camp Forever Young, Inc.

During the planning session for the next camping season, the owner, Harper Lewis asked you, the Chief Financial Officer for Camp Forever Young, Inc., to predict her fuel costs each coming week.

Harper typically staffs the desk at the campground - answering the phone, checking in customers, and taking payment - while her staff pickup customers at the airport and drives them to the various camp sites. Since she is not actively driving the van, it has been her process to maintain a separate bank account specifically for fuel costs and giving the debit card tied to the account to her staff. That way, staff members can easily fill the tank on the way back from dropping off customers. Harper wants to keep a low balance in this account, just sufficient to pay fuel costs for the upcoming week. To that end, she currently checks the balance in the account each Monday morning, and transfers in just enough funds to bring the balance to $1,000.

Harper developed this current system as a way of limiting her risk of fraud. Several years ago, Harper simply gave her credit card to staff members to pay for fuel. One time, a staff member charged an additional $1,850 (buying gift cards for personal use). The staff member collected their paycheck at the end of the week and was never seen again. When the credit card statement came later that month, Harper was stuck with the bill. Harper wants to keep the account balance low to minimize her risk of fraud. At the same time, there is also a risk to keeping that account balance too low. This past season, Harper had some cash flow issues - there were a couple of occasions where the company debit card was declined for insufficient funds at the gas station. This can also be a serious problem. If the card is declined and the van runs out of gas, she may lose customers or get unfavorable Yelp ratings. If the charge does go through when the account has an insufficient balance, Harper would be liable for overdraft fees. Therefore, Harper wants to improve from her current process of refilling that account to $1,000 at the beginning of each week while minimizing both these risks.

Harper started out by collecting data - on each Monday morning, she recorded the price of gas and the number of reservations for the coming week (see the attached Excel spreadsheet). She would like to use one of these measures to estimate the week's fuel costs, but she is not sure which one would give her the best estimate. The number of reservations tells her how many customers have reserved campsites for the coming week, but some reservations are later cancelled (or no-shows) and many customers show up unannounced for a trip. In addition, the price of gas on Monday morning usually does not stay the same through the entire week. Harper knows that neither of these variables will perfectly predict her fuel costs, but figures that anything would be better than her current process.

Required: memo, as the CFO of Camp Forever Young, addressed to Harper Lewis describing your analysis and the outcomes. Make sure you respond to the following items:

1. Of the three cost estimation methods covered in this class (high-low method, scatter diagrams, or least squares regression), which would give the most accurate cost estimates? Explain why that method is more accurate, and how it works.
2. Which of the two variables (number of reservations or gas price) is a better predictor of fuel costs? Attach a financial analysis (e.g., graphs or tables), either at the end of the memo or as a separate file, to illustrate your response.
3. Using the method selected in requirement (1), develop a cost estimating equation for fuel costs at Camp Forever Young. Identify the fixed and variable cost components of your cost estimating equation, and explain what they mean.
4. Explain to Harper how she could use this cost estimation analysis to improve her process of replenishing the fuel cost bank account at the beginning of each week, taking into consideration her goals of minimizing both risk of overdraft and risk of fraud. Be specific, document the improved process in detail.
5. Conclude with any further recommendations resulting from your analysis.