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17 May, 09:45

Richardson Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 15 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 $350 per round-trip, and one that has made 2,000 round-trips in the year incurs an average operating cost of $300 per round-trip.

Using the high-low method, estimate the linear relationship y equals a plus 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.

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  1. 17 May, 12:42
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    Y = $100,000 + $250X

    Explanation:

    For computing the linear relationship, first we need to compute the variable cost and fixed cost by using the high low method is shown below:

    Before that first we have to determine the total cost

    Total cost of 1,000 round-trips = $350 * 1,000 = $350,000

    Total cost of 2,000 round-trips = $300 * 2,000 = $600,000

    Now the variable cost per round trip is

    = ($600,000 - $350,000) : (2,000 - 1,000)

    = $250

    Variable cost per round-trip is $300.

    And, the fixed cost is

    = $600,000 - 2,000 * $250

    = $600,000 - $500,000

    = $100,000

    Now the linear relationship is

    Y = $100,000 + $250X
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