Chapter 6, Problem 43P

Shortly after being hired as an analyst with Global American Airlines, Kim Williams was asked to prepare a report that focused on passenger ticketing cost. The airline writes most of its own tickets (largely through reservations personnel), makes little use of travel agents, and has seen an ever-increasing passenger interest in e-ticketing (i.e., electronic reservations and tickets handled over the Internet).

After some discussion, Williams thought it would be beneficial to begin her report with an overview of three different cost estimation tools: scatter diagrams, least-squares regression, and the high-low method. She would then present the results of her analysis of the past year’s monthly ticketing cost, which was driven largely by the number of tickets written. These results would be presented in the form of algebraic equations that were derived by the three tools just cited. The equations follow. (C denotes ticketing cost, and PT denotes number of passenger tickets written.)

$\begin{array}{l}\text{Scatter}\text{diagram: C}=\$320,000+\$2.15\text{PT}\\ \text{Least-square}\text{regression: C}=\text{\$312,000 +\$2}\text{.30PT}\\ \text{High-low}\text{method: C}=\$295,000+\$2.55\text{PT}\end{array}$

Williams had analyzed data over the past 12 months and built equations on these data, purposely including the slowest month of the year (February) and the busiest month (November) so that things would “… tend to average out.” She observed that November was especially busy because of Thanksgiving, passengers purchasing tickets for upcoming holiday travel in December, and the effects of a strike by Delta Western Airlines, Global American’s chief competitor. The lengthy strike resulted in many of Delta Western’s passengers being rerouted on Global American flights.

Required:

1. 1. Prepare a bullet-point list suitable for use in Williams’s report that describes the features of scatter diagrams, least-squares regression, and the high-low method. Determine which of the three tools will typically produce the most accurate results.
2. 2. Will the three cost estimation tools normally result in different equations? Why?
3. 3. Assuming the use of least-squares regression, explain what the $312,000 and $2.30 figures represent.
4. 4. Assuming the use of a scatter diagram, predict the cost of an upcoming month when Global American expects to write 580,000 tickets.
5. 5. Did Williams err in constructing the equations on data of the past 12 months? Briefly explain.
6. 6. Assume that over the next few years, more of Global American’s passengers will take advantage of e-ticketing over the Internet. What will likely happen to the airline’s cost structure in terms of variable and fixed cost incurred?