Cost Estimation

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Cost estimation is a fundamental aspect of managerial/cost accounting (Datar et al. 2008; Eldenburg and Wolcott 2005). The cost predictions are used in each of the management functions. for example used to predict costs so that management can determine the desirability of alternative options and to budget expenditures, profits, and cash flows. The objective is to support students in learning how to apply regression analyses to understand cost behavior and forecast future costs using real data from firms. The case focuses on the harsh financial situation faced by Continental Airlines as a result of the recent financial crisis and the challenges it faces to remain profitable. in 2008,the fourth largest airline in the U.S. and eighth largest in the world,Continental had incurred an operating loss of $71 million dollars—its second consecutive quarterly earnings decline that year. Likewise, passenger volume was significantly down, dropping by nearly 5 percent from the prior year’s quarter. therefore management needed to act swiftly to restore profitability. This could most effectively be accomplished in two ways. First, through a reduction in flying capacity adjusted to match projected passenger demand. With this in mind, Continental’s management agreed to reduce flying capacity by 11 percent on domestic and international routes.2 As a result of this action, Continental would eliminate the least profitable or unprofitable flights and, accordingly, would ground several planes in the fleet. Management anticipated that this decision would reduce several of the firm’s operating costs.In sum, to close the gap in profitability, Continental’s strategy was geared toward slashing operating costs by cutting capacity and through aggressive identification and implementation of cost-cutting initiatives. In order for Continental to restore profitability in this harsh environment of weak demand for air travel, it must be able to contain its operating costs, especially its massive...
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