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Estimating A Cost Function Using The High-Low Method

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Reisen Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 10 helicopters makes between 1,000 and 2,000 round-trips per year. The records indicate that a helicopter that has made 1,000 round-trips in the year incurs an average operating cost of $300 per round-trip, and one that has made 2,000 round-trips in the year incurs an average operating cost of $250 per round-trip.

1. Using the high-low method, estimate the linear relationship y = a + bX, where y is the total annual operating cost of a helicopter and X is the number of round-trips it makes to JFK airport during the year.

2. Give examples of costs that would be included in a and in b.

3. If Reisen Travel expects each helicopter to make, on average, 1,200 round-trips in the coming year, what should its estimated operating budget for the helicopter fleet be?

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The solution estimates a cost function using the high-low method.

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Reisen Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 10 helicopters makes between 1,000 and 2,000 round-trips per year. The records indicate that a helicopter that has made 1,000 round-trips in the year incurs an average operating cost of $300 per round-trip, and one that has made 2,000 ...

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