During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows: Resource Airplane Flight Hours Total Cost
Airplane depreciation:
High 44,000 $ 18,000,000
Low 28,000 18,000,000
Fuel:
High 44,000 445,896,000
Low 28,000 283,752,000
Airplane maintenance:
High 44,000 15,792,000
Low 28,000 11,504,000
Required:
1. Develop an annual cost formula for airplane depreciation.
Total annual cost of airplane depreciation = x $
Develop an annual cost formula for fuel.
Total annual cost of fuel = $ x (Select: Airplane depreciation, Fuel, or Annual number of airplane flights))
Develop an annual cost formula for airplane maintenance.
Total annual cost of airplane maintenance = $ + ($ x (Select: Airplane depreciation, Fuel, or Annual number of airplane flights))
2. Using the three annual cost formulas that you developed, predict the cost of each resource in a year with 480,000 airplane flight hours.

Instructions are below.

Explanation:

Giving the following information:

Airplane depreciation:

High 44,000 $ 18,000,000

Low 28,000 $18,000,000

Fuel:

High 44,000 $445,896,000

Low 28,000 $283,752,000

Airplane maintenance:

High 44,000 $15,792,000

Low 28,000 $11,504,000

Required:

1.

A) Depreciation expense remains constant on both flight hours. Therefore, the depreciation expense is calculated using the straight-line method. In this method, depreciation is constant.

Depreciation expense= $18,000,000

B) To calculate the fuel cost, we need to use the high low method:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (445,896,000 - 283,752,000) / (44,000 - 28,000)

Variable cost per unit= $10,134 per hour of flight.

Fuel is a variable cost.

C) We need to calculate the variable and fixed component of maintenance.

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (15,792,000 - 11,504,000) / (44,000 - 28,000)

Variable cost per unit= $268

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 15,792,000 - (268*44,000)

Fixed costs= $4,000,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 11,504,000 - (268*28,000)

Fixed costs= $4,000,000

2. Hours= 480,000

Depreciation= 18,000,000

Fuel= 10,134*480,000= $4,864,320,000

Maintenance= 268*480,000 + 4,000,000= $132,640,000

Total= $5,014,960,000

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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