FlyHigh Vacations offers helicopter service from suburban towns to Heathrow Airport in the

United Kingdom. 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 $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.

Required:
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 Heathrow
Airport during the year. 
2. Give examples of costs that would be included in a and in b. 
3. If FlyHigh Vacations 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?

SOLUTION

(15–20 min.) Estimating a cost function, high-low method.

1. The key point to note is that the problem provides high-low values of X (annual round
trips made by a helicopter) and Y ÷ X (the operating cost per round trip). We first need to
calculate the annual operating cost Y (as in column (3) below), and then use those values to
estimate the function using the high-low method.

Cost Driver:  Annual

Annual Round- Operating Cost  per Operating 
Trips (X) Round-Trip Cost (Y)
  (1) (2) (3) = (1) (2)
Highest observation of
cost driver 2,000 $300 $600,000
Lowest observation of
cost driver 1,000 $350 $350,000
Difference 1,000   $250,000
       
Slope coefficient = $250,000 ÷ 1,000 = $250per round-trip
Constant = $600,000 – ($250 × 2,000) = $100,000

The estimated relationship is Y = $100,000 + $250 X; where Y is the annual operating cost of a
helicopter and X represents the number of round trips it makes annually. 

2. The constant a (estimated as $100,000) represents the fixed costs of operating a helicopter,
irrespective of the number of round trips it makes. This would include items such as insurance,
registration, depreciation on the aircraft, and any fixed component of pilot and crew salaries. The
coefficient b (estimated as $250 per round-trip) represents the variable cost of each round trip—
costs that are incurred only when a helicopter actually flies a round trip. The coefficient b may
include costs such as landing fees, fuel, refreshments, baggage handling, and any regulatory fees
paid on a per-flight basis.
3. If each helicopter is, on average, expected to make 1,200 round trips a year, we can use the
estimated relationship to calculate the expected annual operating cost per helicopter:

Y = $100,000 + $250 X
X = 1,200
Y = $100,000 + $250 × 1,200 = $100,000 + $300,000 = $400,000

With 10 helicopters in its fleet, FlyHigh Vacations’ estimated operating budget is 10 × $400,000 =
$4,000,000.