This is an exercise in predictive analytics. Estimation of the cost function and evaluation of the cost
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This is an exercise in predictive analytics. Estimation of the cost function and evaluation of the cost function is an important skill for MBAs. As often happens, you will get a cost function that includes both fixed and variable components, so you will need to identify and separate those components. You will practice using the High-Low method and simple regression in the case.
One of the most common mistakes using the High-Low method is picking the wrong data points. For the 're - analyzing' case, we'll be using the spreadsheet called Exhibit 2 and 4 side by side.
Let's find the data points to use for the Delta Low values. The case specifies that we will compare Revenue Passenger Miles and salary expense. Locate the appropriate columns on the spreadsheet: Revenue Passenger Miles in column AF and Salary and Related Costs in column G. Find the lowest value for Revenue Passenger Miles in column AF. It should be no surprise that it is the first time period, 93T1, with a value of 14. Now, for the SAME TIME PERIOD, locate the entry in column G. Your value for Salary and Related Costs in 93T1 is $1200. The Delta High values for your analysis are obtained in a similar method. Always use the same time period for both variables.
One of the most common mistakes using the High-Low method is picking the wrong data points. For the 're - analyzing' case, we'll be using the spreadsheet called Exhibit 2 and 4 side by side.
Let's find the data points to use for the Delta Low values. The case specifies that we will compare Revenue Passenger Miles and salary expense. Locate the appropriate columns on the spreadsheet: Revenue Passenger Miles in column AF and Salary and Related Costs in column G. Find the lowest value for Revenue Passenger Miles in column AF. It should be no surprise that it is the first time period, 93T1, with a value of 14. Now, for the SAME TIME PERIOD, locate the entry in column G. Your value for Salary and Related Costs in 93T1 is $1200. The Delta High values for your analysis are obtained in a similar method. Always use the same time period for both variables.
A word about your regression analysis. Use ALL the data available for each airline. When you do this analysis, not to worry if your R-squared value is low; it doesn't give me the warm fuzzies either. A better value is obtained with a multiple regression, but that is not part of this assignment.
And, just to clarify, when you are asked for a cost function, the response should be the equation itself, in this case Salaries=FC + (VC * Revenue Passenger Miles).
On another topic in the discussion boards, refresh your memory about operating leverage from the text, not from Investopedia and the like. In this class we are concerned about cost structure.
On another topic in the discussion boards, refresh your memory about operating leverage from the text, not from Investopedia and the like. In this class we are concerned about cost structure.
Related Book For
Service Management Operations Strategy Information Technology
ISBN: 978-0077841201
8th edition
Authors: James Fitzsimmons, Mona Fitzsimmons, Sanjeev Bordoloi
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