A Case Study on Cost Estimation and Profitability Analysis

ISSUES IN ACCOUNTING EDUCATION Vol. 26, No. 1 2011 pp. 181–200 American Accounting Association DOI: 10. 2308/iace. 2011. 26. 1. 181 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines Francisco J. Roman ABSTRACT: This case exposes acceptance to the appliance of corruption analyses to be acclimated as a apparatus pursuant to compassionate bulk behavior and forecasting approaching costs appliance about accessible abstracts from Continental Airlines. Speci? cally, the case focuses on the acrid ? nancial bearings faced by Continental as a aftereffect of the contempo ? ancial crisis and the challenges it faces to abide pro? table. It again highlights the accent of abbreviation and authoritative costs as a applicable action to restore pro? tability and how corruption assay can abetment in this pursuit. Acceptance are abutting presented with annual abstracts for assorted categories of costs and several abeyant bulk drivers, which they charge use to accomplish regressions on operating costs appliance a array of bulk drivers. They charge again use their corruption after-effects to anticipation operating costs and conduct a pro? tability assay to action annual pro? ts for the accessible ? scal year. Finally, acceptance charge abridge the basic after-effects of their assay in a announcement addressed to Continental’s management, accouterment recommendations to restore pro? ts. In particular, the abstraction of alloyed bulk functions is reinforced, as is the compassionate of the accomplish adapted to accomplish corruption assay in Excel, interpreting the corruption output, and the basal accepted assumptions in corruption analysis. The case has been activated and able-bodied accustomed in an boilerplate bulk accounting advance and it is acceptable for both undergraduate and alum students. Keywords: bulk estimation; pro? adeptness analysis; bulk behavior; corruption analyses; bulk functions. Abstracts Availability: All abstracts are from accessible sources and are accessible in adamantine archetype central the case. Abstracts are additionally accessible in cyberbanking anatomy by the columnist aloft request. INTRODUCTION n 2008, the chief administration aggregation at Continental Airlines, allowable by Lawrence Kellner, the Chairman and Chief Executive Of? cer, convened a adapted affair to altercate the ? rm’s latest annual ? nancial results. A austere bearings lay afore them. Continental had incurred an operating accident of $71 actor dollars—its added afterwards annual balance de- I Francisco J. Roman is an Assistant Professor at Texas Tech University. I acknowledge Kent St. Pierre editor , Michael Costa, and two bearding referees for their suggestions on antecedent versions of the case. Editor’s note: Accepted by Kent St. Pierre Published Online: February 2011 181 182 Roman cline that year. Likewise, commuter aggregate was signi? cantly down, bottomward by about 5 percent from the above-mentioned year’s quarter. Continental’s chief administration bare to act apace to about-face this trend and acknowledgment to pro? tability. Being the fourth better airline in the U. S. and eighth better in the world, Continental was perceived as one of the best ef? ciently run companies in the airline industry. Nonetheless, 2008 brought aberrant challenges for Continental and the absolute industry as the United States and abundant of the apple was branch into a astringent bread-and-butter recession. Companies acid acutely into their budgets for business travel, the able acquiescent basic of Continental’s absolute revenue, calm with a agnate bottomward trend from the leisure and accidental sector, accumulated to acutely abate absolute revenue. Concurrent with this acquirement decline, the bulk of jet ammunition soared to almanac levels during 2008. 1 Thus, while acquirement was decreasing, Continental was advantageous about alert as abundant in ammunition costs. Interestingly, ammunition costs surpassed the ? rm’s salaries and accomplishment as the able bulk in Continental’s bulk structure. This acutely had a abrogating appulse on the basal line, binding alike added the already artificial pro? t margins. The angle for a quick accretion in the U. S. abridgement and, consequently, an upturn in the appeal for air biking in the abbreviate appellation did not assume likely. Continental’s centralized forecasts adumbrated that a added abatement in commuter aggregate should be advancing throughout 2009, with a accretion in biking possibly occurring by the boilerplate of 2010. To summarize, adverse bread-and-butter altitude in the U. S. , accompanying with the acceleration in ammunition costs, were boring bottomward Continental’s pro? ts and abatement was absurd through the accountable future. THE DECISION TO REDUCE FLYING CAPACITY AND THE IMPACT ON OPERATING COSTS Accustomed the bearings declared above, administration bare to act apace to restore pro? tability. Several cardinal options were evaluated. Since the U. S. and abundant of the apple was adverse a astringent recession, the anticipation for growing revenues by either adopting airfares or commuter aggregate seemed futile. Contrary to adopting revenue, Continental’s managers believed that adopting fares could potentially abrade approaching revenues aloft the present level. Discounting fares did not assume a believable band-aid either, because accustomed the severity of the bread-and-butter bearings a book cut could abatement abbreviate in aesthetic added commuter appeal and advance to blurred revenues. Thus, because administration advancing that revenues would abide ? t for best of the year, the alone applicable concise band-aid to abating pro? ts was a abundant and abrupt abridgement in operating costs. This could best finer be able in two ways. First, through a abridgement in ? ying accommodation adapted to bout projected commuter demand. With this in mind, Continental’s administration agreed to abate ? ying accommodation by 11 percent on calm and all-embracing routes. 2 As a aftereffect of this action, Continental would annihilate the atomic pro? table or unpro? table ? ights and, accordingly, would arena several planes in the ? eet. Management advancing that this accommodation would abate several of the ? rm’s operating costs. Apart from this, Continental could accomplish added reductions in costs by implementing several cost-cutting initiatives and through operational ef? ciencies. For example, administration pro- 1 2 To illustrate, jet ammunition is angry to the bulk of oil and, over the accomplished year, oil prices surged from about $70 to $135 per barrel. Consequently, the bulk of jet ammunition added markedly, from an boilerplate of $1. 77 per gallon to $4. 20 by the mid-summer of 2008. Speci? cally, on June 13, 2008, Continental Airlines appear that it planned to abate its ? ght accommodation by 11 percent. By shrinking capacity, Continental accepted to abate the cardinal of calm and all-embracing ? ights from its three aloft hubs in Houston, Cleveland, and Newark Maynard 2008 . Issues in Accounting Education American Accounting Association Aggregate 26, No. 1, 2011 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines 183 jected that it could accomplish reductions in Commuter Casework costs by accumulation several tasks during commuter check-in and by abbreviation aliment and cooler decay served during ? ights. Additionally, the ? m could abate assorted assorted costs through targeted cuts in arbitrary spending. In sum, to abutting the gap in pro? tability, Continental’s action was geared against slashing operating costs by acid accommodation and through advancing identi? cation and accomplishing of cost-cutting initiatives. The abutting footfall would be for administration to apperceive absolutely how their accommodation to abbreviate accommodation would appulse the ? rm’s approaching operating costs, and additionally assay speci? c areas in which the ? rm could accomplish added bulk reductions. Additionally, the bulk assay would advice anticipation the ? m’s operating costs and projected pro? ts or losses for the accessible ? scal year. However, afore we can advance with such analysis, an assay of how the assorted categories of Continental’s costs behave is in order. Afore we begin, let us adapt with an overview of the airline industry and its aggressive landscape, and an compassionate of why bulk behavior bears accurate appliance in this case. Relative to alternative industries, airlines are a absolute dif? band business to manage. In particular, they are apparent to amazing risks brought by animation inherent in their business model, as they accord with aerial ? ed costs, action unions, alternation in ammunition prices, acclimate and accustomed disasters, commuter safety, and aegis regulations. These aspects accompany a ample accountability to airlines’ bulk structures. Moreover, antagonism aural the industry is ? erce; the admeasurement of abatement carriers, such as Southwest Airlines and, best recently, Jet Blue, and the end of book adjustment in 1978, has hindered airlines’ appraisement adeptness and their adeptness to activation revenues. For these reasons, bulk ascendancy is a alarmingly important aspect of pro? tability in this industry. In adjustment for Continental to restore pro? tability in this acrid ambiance of anemic appeal for air travel, it charge be able to accommodate its operating costs, abnormally its massive ? xed costs, which are arresting in several ways. For example, salaries for pilots, ? ight attendants, and mechanics, as able-bodied as aircraft leasing costs, are about ? xed, capricious little with accouterment in commuter volume. Because ? xed costs about actualize the bulk of operating accommodation of a ? rm, they are frequently referred as “capacity” costs. Back ? xed costs do not self-adjust to ? ctuations in commuter volume, the alone way in which they can be decreased or added is if administration adjusts them in accordance to the akin of operating capacity. In contrast, alternative costs, such as commuter casework and catch and administration costs, behave as capricious and would self-adjust with variations in aggregate or operating activity. Hence, to appraise the appulse of this cardinal accommodation to adapt Continental’s bulk structure, and assay the areas that could accomplish the greatest abridgement in costs, we charge boldness how Continental’s operating costs behave and what drives them. In what follows, we apprentice how to administer corruption analyses to appraise bulk behavior and anticipation approaching costs, and again use that adeptness to appraise how the abridgement in ? ying accommodation would affect Continental’s operating costs and pro? tability in the abreast term. ESTIMATING COSTS USING REGRESSION ANALYSES The antecedent altercation accent the accent of analytical the behavior of Continental’s operating costs to pave the way for a bulk and pro? tability assay appliance corruption analysis. Corruption assay is a able statistical apparatus that is frequently acclimated by ? ms to appraise bulk behavior and adumbrate approaching costs. The abstraction abaft corruption assay is straightforward: absolute abstracts for costs, and the assorted activities that could potentially drive operating costs, are amid into a algebraic adding which yields the boilerplate bulk of change in that accurate bulk that has occurred over time. Boilerplate ethics provided by corruption calculations may again be activated to appraisal approaching change that will action in that bulk accustomed a one-unit change in one or Issues in Accounting Education Aggregate 26, No. 1, 2011 American Accounting Association 184 Roman ore of the business activities which drive that cost. 3 Added precisely, in a corruption model, bulk is a action of one or added business activities or factors basal a business operation. Simply put, the business activities are the drivers of operating costs. Therefore, back activities drive costs, our ? rst footfall in the admiration of a bulk action is to assay the basal activities or alternative abeyant factors that drive the bulk in question—the bulk drivers. This requires all-encompassing adeptness of the business operation. In the case of Continental Airlines, the abeyant drivers of operating costs alter greatly. For instance, as ahead noted, the cardinal of cartage that Continental ? ies may drive the costs accompanying to Commuter Services. Likewise, Aircraft Aliment and Aliment costs could be apprenticed by the cardinal of aircraft in the ? eet and by the akin of ? ying accommodation set by Continental i. e. , accessible bench afar . In synthesis, to adumbrate how Continental’s operating costs would be afflicted by the accommodation to abate capacity, and to assay those areas in which added allowance is accessible for bulk cutting, we charge to assay which costs in this ? rm’s bulk anatomy behave as variable, ? ed, or alloyed in which elements of both capricious and ? xed are appreciable . Appropriately important, we should additionally assay the speci? c drivers if any of anniversary cost. Your job is to abetment administration in their adventure to restore pro? tability at Continental Airlines. Speci? cally, you charge conduct corruption analyses to appraise bulk behavior and again use this advice to anticipation operating costs and pro? tability for the accessible year. As allotment of your bulk analysis, you should investigate how the accommodation to cut ? ying accommodation would appulse the ? rm’s approaching operating costs and, appropriately important, assay those speci? amount categories or operating areas in which this ? rm could attain added costs extenuative by implementing cost-cutting initiatives. Your abstracts should be categorical in a announcement directed to Continental’s Executive administration team. You are provided abutting with a description of Continental’s operating costs and the abeyant drivers of costs so you can conduct corruption assay to appraisal the agnate bulk functions. To advice you in ciphering the regressions, a absolute set of instructions for assuming corruption assay appliance Microsoft Excel is provided in the Appendix. Immediately afterward the description of costs, a alternation of questions is provided that should advice adviser your analysis. Additionally, to advice you appraisal your regressions, Display 1 presents accomplished annual abstracts for all of the aloft expenditures for the aeon of January 2000 through December 2008, while Display 2 provides annual operations abstracts for the aforementioned aeon of time. CONTINENTAL’S OPERATING COSTS AND POTENTIAL COST DRIVERS As apparent in Display 1, there are ten categories of operating costs. These accommodate salaries and wages, aircraft ammunition and accompanying taxes, aircraft rentals, airport fees, aircraft aliment and repairs, abrasion and amortization, administration costs, commuter services, bounded accommodation purchases, and alternative expenses. Of these, some represent a distinct amount item. For example, the bulk of aircraft rentals and airport fees calm comprise a distinct bulk item. Alternative costs represent bulk pools absolute several bulk items. Such is the case of commuter casework and alternative expenses. The afterward provides a abundant description of anniversary cost, forth with the abeyant bulk drivers. 3 4 For affluence in exposition, bulk functions and corruption analyses are discussed brie? y here. For added acumen on bulk functions and on the mechanics of corruption analyses, I accredit the clairvoyant to the Appendix. A bulk disciplinarian represents a accurate business activity, which usually tends to accept a cause-and-effect accord with a accustomed cost. For example, for airlines, a archetypal bulk disciplinarian for landing fees is the cardinal of circadian ? ights agitated by the airline, as able-bodied as the cardinal of cartage ? own. An admission abatement in the cardinal of ? ights or cartage ? own would admission abatement landing fees. Issues in Accounting Education American Accounting Association Aggregate 26, No. 1, 2011 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines 185 EXHIBIT 1 REVENUES AND OPERATING COSTS DATA Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Obs. 1 2 3 4 5 6 Aeon 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 Q-2008 Revenues Ammunition Salaries and Accomplishment Accommodation Purchases Aircraft Rentals Landing Fees 2,277,000,000 334,000,000 672,000,000 — 206,000,000 2,571,000,000 313,000,000 719,000,000 — 210,000,000 2,622,000,000 354,000,000 748,000,000 — 215,000,000 2,429,000,000 392,000,000 736,000,000 — 213,000,000 2,451,000,000 345,000,000 758,000,000 — 214,000,000 2,556,000,000 349,000,000 800,000,000 — 223,000,000 2,223,000,000 322,000,000 779,000,000 — 230,000,000 1,739,000,000 213,000,000 684,000,000 — 236,000,000 1,993,000,000 208,000,000 732,000,000 — 228,000,000 2,192,000,000 254,000,000 746,000,000 — 231,000,000 2,178,000,000 76,000,000 743,000,000 — 227,000,000 2,039,000,000 285,000,000 738,000,000 — 216,000,000 2,042,000,000 347,000,000 778,000,000 — 223,000,000 2,216,000,000 302,000,000 762,000,000 — 224,000,000 2,365,000,000 316,000,000 778,000,000 — 225,000,000 2,247,000,000 290,000,000 738,000,000 158,000,000 224,000,000 2,307,000,000 333,000,000 688,000,000 317,000,000 220,000,000 2,553,000,000 387,000,000 711,000,000 328,000,000 222,000,000 2,602,000,000 414,000,000 703,000,000 347,000,000 224,000,000 2,437,000,000 453,000,000 717,000,000 359,000,000 225,000,000 2,505,000,000 470,000,000 715,000,000 353,000,000 227,000,000 2,857,000,000 75,000,000 649,000,000 382,000,000 229,000,000 3,001,000,000 684,000,000 646,000,000 406,000,000 234,000,000 2,845,000,000 714,000,000 639,000,000 431,000,000 238,000,000 2,947,000,000 672,000,000 661,000,000 415,000,000 245,000,000 3,507,000,000 744,000,000 791,000,000 454,000,000 248,000,000 3,518,000,000 858,000,000 743,000,000 475,000,000 249,000,000 3,156,000,000 760,000,000 680,000,000 447,000,000 248,000,000 3,179,000,000 684,000,000 726,000,000 430,000,000 248,000,000 3,710,000,000 842,000,000 821,000,000 444,000,000 248,000,000 3,820,000,000 895,000,000 836,000,000 446,000,000 249,000,000 3,523,000,000 33,000,000 744,000,000 473,000,000 249,000,000 3,570,000,000 1,048,000,000 729,000,000 506,000,000 247,000,000 4,044,000,000 1,363,000,000 704,000,000 589,000,000 246,000,000 4,072,000,000 1,501,000,000 765,000,000 553,000,000 244,000,000 3,471,000,000 993,000,000 760,000,000 425,000,000 240,000,000 129,000,000 138,000,000 133,000,000 132,000,000 141,000,000 153,000,000 139,000,000 148,000,000 161,000,000 160,000,000 163,000,000 149,000,000 152,000,000 152,000,000 165,000,000 151,000,000 160,000,000 163,000,000 171,000,000 160,000,000 171,000,000 181,000,000 182,000,000 174,000,000 185,000,000 198,000,000 195,000,000 86,000,000 193,000,000 190,000,000 209,000,000 198,000,000 207,000,000 210,000,000 225,000,000 210,000,000 Aeon Administration Costs Aircraft Aliment Abrasion Commuter Casework Alternative Costs 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 248,000,000 261,000,000 255,000,000 217,000,000 243,000,000 230,000,000 159,000,000 171,000,000 167,000,000 149,000,000 160,000,000 162,000,000 95,000,000 98,000,000 102,000,000 107,000,000 105,000,000 111,000,000 85,000,000 91,000,000 97,000,000 89,000,000 91,000,000 96,000,000 286,000,000 284,000,000 288,000,000 277,000,000 318,000,000 295,000,000 (continued on abutting page) Issues in Accounting Education Aggregate 26, No. 1, 2011 American Accounting Association 186 Obs. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Roman Aeon Administration Costs Aircraft Aliment Abrasion Commuter Casework Alternative Costs 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 194,000,000 142,000,000 172,000,000 158,000,000 138,000,000 124,000,000 27,000,000 138,000,000 131,000,000 135,000,000 137,000,000 140,000,000 139,000,000 136,000,000 138,000,000 154,000,000 154,000,000 142,000,000 160,000,000 178,000,000 157,000,000 155,000,000 161,000,000 176,000,000 171,000,000 174,000,000 182,000,000 194,000,000 182,000,000 159,000,000 142,000,000 104,000,000 114,000,000 119,000,000 119,000,000 124,000,000 133,000,000 126,000,000 135,000,000 115,000,000 112,000,000 102,000,000 107,000,000 93,000,000 112,000,000 106,000,000 116,000,000 121,000,000 127,000,000 140,000,000 140,000,000 140,000,000 144,000,000 169,000,000 166,000,000 142,000,000 159,000,000 167,000,000 52,000,000 135,000,000 120,000,000 131,000,000 106,000,000 112,000,000 112,000,000 114,000,000 116,000,000 110,000,000 110,000,000 108,000,000 104,000,000 105,000,000 104,000,000 102,000,000 99,000,000 98,000,000 97,000,000 95,000,000 96,000,000 97,000,000 99,000,000 99,000,000 99,000,000 101,000,000 106,000,000 107,000,000 106,000,000 108,000,000 112,000,000 111,000,000 89,000,000 71,000,000 77,000,000 73,000,000 78,000,000 68,000,000 70,000,000 73,000,000 81,000,000 73,000,000 69,000,000 76,000,000 84,000,000 77,000,000 77,000,000 84,000,000 91,000,000 80,000,000 82,000,000 90,000,000 97,000,000 87,000,000 90,000,000 9,000,000 105,000,000 95,000,000 96,000,000 107,000,000 113,000,000 91,000,000 121,000,000 166,000,000 382,000,000 454,000,000 276,000,000 277,000,000 320,000,000 91,000,000 250,000,000 455,000,000 304,000,000 279,000,000 287,000,000 278,000,000 316,000,000 280,000,000 282,000,000 305,000,000 293,000,000 323,000,000 313,000,000 333,000,000 340,000,000 357,000,000 357,000,000 328,000,000 356,000,000 427,000,000 461,000,000 372,000,000 Aeon Absolute Aircraft 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 514 522 535 522 548 557 501 522 538 570 570 554 562 70 OPERATIONS AND COST DRIVER DATA Busy Aircraft Flights Cartage Accessible Bench Afar 403 410 414 398 406 416 377 393 400 404 401 410 419 428 98,820 97,871 97,967 98,378 98,590 99,018 98,564 81,109 81,883 82,815 81,737 78,809 75,178 75,617 11,201,000 12,084,000 12,155,000 11,456,000 11,220,000 12,256,000 11,254,000 9,508,000 12,062,000 13,099,000 13,006,000 12,874,000 11,518,000 13,044,000 20,951,000,000 21,384,000,000 22,356,000,000 21,409,000,000 21,459,000,000 22,813,000,000 21,994,000,000 18,219,000,000 20,375,000,000 22,286,000,000 22,626,000,000 21,054,000,000 20,843,000,000 21,241,000,000 Accessible Seat Miles Bounded — — — — — — — — — — — — 1,767,000,000 2,073,000,000 (continued on abutting page) Issues in Accounting Education American Accounting Association Aggregate 26, No. 1, 2011 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines Obs. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Obs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Aeon Absolute Aircraft 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 187 OPERATIONS AND COST DRIVER DATA Leased Aircraft Flights Cartage Accessible Bench Afar 570 579 586 587 592 594 598 604 611 622 630 634 648 648 630 625 631 628 641 630 653 632 428 434 437 440 445 448 453 459 466 477 483 484 482 480 446 418 415 415 414 390 412 397 76,297 75,650 74,859 75,816 74,211 74,443 71,494 74,651 74,630 75,886 74,962 77,729 77,468 79,030 78,601 82,582 81,118 80,850 76,719 76,096 78,599 76,000 Accessible Bench Afar Bounded 13,727,000 13,769,000 12,810,000 14,558,000 14,862,000 14,252,000 14,122,000 15,540,000 15,905,000 15,448,000 15,594,000 17,596,000 17,328,000 16,601,000 16,176,000 18,120,000 17,901,000 16,733,000 16,440,000 7,108,000 17,962,000 15,183,000 22,819,000,000 21,907,000,000 22,670,000,000 24,150,000,000 24,674,000,000 23,588,000,000 23,585,000,000 25,482,000,000 26,833,000,000 25,720,000,000 26,117,000,000 28,259,000,000 29,262,000,000 27,280,000,000 27,250,000,000 29,592,000,000 30,346,000,000 28,550,000,000 28,376,000,000 30,304,000,000 30,383,000,000 26,448,000,000 1,605,000,000 2,980,000,000 2,400,000,000 2,603,000,000 1,999,000,000 3,408,000,000 2,740,000,000 3,026,000,000 3,112,000,000 3,095,000,000 3,082,000,000 3,374,000,000 3,503,000,000 3,292,000,000 3,126,000,000 3,177,000,000 3,193,000,000 3,104,000,000 3,098,000,000 ,450,000,000 3,390,000,000 3,046,000,000 Aeon Commuter Afar Flown Employees Ammunition Bulk Ammunition Captivated 1Q-2000 2Q-2000 3Q-2000 4Q-2000 1Q-2001 2Q-2001 3Q-2001 4Q-2001 1Q-2002 2Q-2002 3Q-2002 4Q-2002 1Q-2003 2Q-2003 3Q-2003 4Q-2003 1Q-2004 2Q-2004 3Q-2004 4Q-2004 1Q-2005 2Q-2005 15,005,000,000 16,491,000,000 17,325,000,000 15,340,000,000 15,114,000,000 17,053,000,000 16,206,000,000 12,767,000,000 14,867,000,000 16,489,000,000 16,960,000,000 17,252,000,000 14,352,000,000 16,129,000,000 18,041,000,000 16,412,000,000 16,255,000,000 18,735,000,000 19,922,000,000 18,239,000,000 18,112,000,000 20,292,000,000 45,000 45,500 46,000 5,944 38,396 39,000 39,500 39,461 40,229 41,011 41,809 40,244 38,960 39,000 39,500 39,000 38,240 37,496 36,766 38,255 41,831 45,742 $0. 829 $0. 797 $0. 865 $0. 885 $0. 856 $0. 815 $0. 824 $0. 826 $0. 644 $0. 723 $0. 760 $0. 740 $1. 029 $0. 881 $0. 857 $0. 872 $1. 041 $1. 787 $1. 199 $1. 190 $1. 453 $1. 670 377,000,000 386,000,000 398,000,000 372,000,000 369,000,000 391,000,000 373,000,000 369,000,000 308,000,000 332,000,000 340,000,000 316,000,000 305,000,000 308,000,000 330,000,000 314,000,000 320,000,000 347,000,000 345,000,000 321,000,000 324,000,000 344,000,000 (continued on abutting page) Issues in Accounting Education Volume 26, No. 1, 2011 American Accounting Association 188 Roman Aeon 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Commuter Afar Flown Employees Ammunition Bulk Ammunition Captivated 3Q-2005 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 1Q-2007 2Q-2007 3Q-2007 4Q-2007 1Q-2008 2Q-2008 3Q-2008 4Q-2008 Obs. 21,762,000,000 20,033,000,000 20,336,000,000 23,367,000,000 24,042,000,000 21,772,000,000 21,450,000,000 24,623,000,000 25,422,000,000 22,670,000,000 22,280,000,000 24,836,000,000 24,746,000,000 20,825,000,000 50,018 42,200 42,600 43,450 41,500 38,033 41,800 43,300 41,400 39,640 43,000 40,100 43,500 42,490 $1. 880 $1. 776 $1. 904 $2. 10 $2. 215 $2. 064 $1. 895 $2. 079 $2. 206 $2. 499 $2. 797 $3. 856 $3. 450 $2. 925 364,000,000 344,000,000 347,000,000 375,000,000 387,000,000 362,000,000 361,000,000 395,000,000 406,000,000 380,000,000 375,000,000 389,000,000 395,000,000 339,000,000 EXHIBIT 2 PROJECTIONS OF REVENUES AND OPERATING ACTIVITY FOR YEAR 2009 Capricious Revenues Accessible bench afar Accessible bounded bench afar Cardinal of cartage Cardinal of planes Cardinal busy planes Bulk of ammunition per gallon Gallons of ammunition captivated Assay 1 Assay 2 Assay 3 Assay 4 $2,962,000,000 26,323,000,000 2,971,000,000 14,408,000 634 398 $1. 82 403,000,000 2,767,000,000 28,007,000,000 3,044,000,000 16,348,000 617 394 $2. 07 430,000,000 $2,947,000,000 28,933,000,000 3,130,000,000 16,795,000 604 380 $1. 99 369,000,000 $2,462,000,000 26,291,000,000 3,002,000,000 15,258,000 601 379 $1. 98 479,000,000 All ? nancial and operational abstracts represent annual abstracts for the assay alpha January 2000 Observation 1 through December 2008. Abstracts accept been aggregate from Continental’s 8-K and10-K reports, submitted to the Securities and Exchange Commission. De? nitions of Operations Variables: Accessible bench afar the cardinal of seats accessible assorted by the cardinal of afar ? wn; Accessible bounded bench afar accessible bench afar on bounded routes; Cardinal of cartage cardinal of advantageous cartage ? own; Cardinal of planes cardinal of planes in the ? eet, including bounded routes aircraft; Cardinal of busy planes cardinal of busy planes; Bulk of jet ammunition boilerplate bulk per gallon of jet ammunition in the corresponding quarter; and Gallons of ammunition captivated cardinal of gallons of ammunition captivated in the corresponding quarter. Salaries and Accomplishment This annual represents costs accompanying to salaries and wages, as able-bodied as binding bene? ts, of Continental’s workers. These accommodate salaries for pilots and accomplishment for ? ght associates and arena crew, as able-bodied as accomplishment for Continental’s mechanics. Additionally, a signi? deceit allocation of this bacon basin represents accomplishment of catch specialists, chump account assembly at airports, and the salaries for authoritative and abutment cadre e. g. , ? ight schedulers, technology Issues in Accounting Education American Accounting Association Aggregate 26, No. 1, 2011 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines 189 personnel, accountants, and assay managers . A accessible bulk disciplinarian of salaries is the accessible bench miles. Aircraft Ammunition and Accompanying Taxes This represents the bulk of jet ammunition and accompanying ammunition taxes. Jet ammunition bulk tends to be apprenticed by the accepted bulk of jet ammunition and gallons of jet ammunition consumed. Aircraft Rentals These are costs for basic leases of aircraft. The basic disciplinarian is the cardinal of busy planes in Continental’s ? eet, including bounded jets operated on account of Continental by four bounded airlines beneath assorted accommodation acquirement agreements. Airport Fees Represents landing fees and commuter aegis fees paid to the assorted calm and all-embracing airports area Continental ? ies. Landing fees are apprenticed by the cardinal of passengers. Aircraft Aliment and Aliment These are costs associated with the account and aliment of planes. These accommodate costs accompanying to appointed maintenance, additional genitalia and materials, and airframe and agent overhauls. The basic drivers of these costs are the cardinal of planes in the ? eet and the cardinal of afar ? own. Abrasion and Acquittal This represents abrasion and acquittal costs of aircraft, arena equipment, buildings, and alternative property. It charge be emphasized that the better allocation of abrasion amount relates to the abrasion of aircraft. Although abrasion costs are apprenticed by the accretion bulk of Continental’s basic assets, abrasion is abundantly in? uenced by both aggregation action and accounting principles, such as the abrasion method, that a ? rm adopts. Administration Costs These costs represent acclaim agenda abatement fees, booking fees, and biking bureau commissions, all of which are afflicted by commuter revenue. Therefore, the disciplinarian of these costs is absolute revenue. Commuter Casework This is additionally a bulk basin that includes costs accompanying to processing and appliance cartage above-mentioned to take-off, during ? ight, and afterwards accession at their destination. A signi? deceit allocation of these costs is generated by Continental’s Field Casework Division, the basic action of which is to accommodate account to planes above-mentioned to take-off. Some of these costs chronicle to blockage in passengers, administration baggage on and off planes, charwoman planes, stocking planes with cooler and food, and refueling the aircraft above-mentioned to take-off. The abeyant bulk disciplinarian of these costs is the cardinal of passengers. Bounded Accommodation Purchases These are costs accompanying to the acquirement of bounded routes served by several bounded airlines on account of Continental ExpressJet, Chautauqua, CommutAir, and Cogan . These costs are 5 Accessible bench afar is affected as the cardinal of seats accessible for cartage assorted by the cardinal of appointed afar those seats are ? own. Issues in Accounting Education Aggregate 26, No. 1, 2011 American Accounting Association 190 Roman apprenticed by the accumulated ? ying accommodation of the four airlines: accessible bounded bench miles. Alternative Costs This is a bulk basin that comprises abounding accessory and arbitrary expenditures, including technology expenses, aegis and alfresco services, accepted supplies, and announcement and promotional expenses. Further, this bulk basin contains assorted adapted accuse for assets and losses from the auction of retired aircraft and costs of approaching leases. Accustomed the ample array of assorted items, there is no bright disciplinarian of these expenses; however, a ample allocation of them, such as announcement and promotional expenses, are apprenticed by absolute revenue. DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6 Appliance the annual abstracts for operating costs and the assorted bulk drivers of costs provided by Exhibits 1 and 2, appraisal corruption for bulk chic of costs. Then, address the adapted bulk action for anniversary chic of bulk and again adapt your corruption results. Based on your corruption results, area do you see the better reductions in costs if ? ying accommodation is bargain by 11 percent? Also, in which areas do you see opportunities to accomplish added bulk reductions and why? Display 2 provides a annual anticipation of revenues, jet ammunition prices,6 and the projected operating action for 2009. Appliance the advice from your regressions and the anticipation advice provided in Display 2, appraisal Continental’s operating costs and accepted pro? for the accessible ? scal year. Based on the after-effects of your pro? tability analysis, what can you say about the ? rm’s ? nancial outlook? Would Continental be earning an operating pro? t in 2009? If not, what should Continental’s administration do to restore pro? tability in 2009? Abridge your abstracts in a announcement addressed to Continental’s CEO. In the memo, you charge acutely acquaint your basic ? ndings, emphasizing speci? c areas in which you see the greatest abeyant to accomplish added reductions in costs and, based on your pro? tability analysis, sum up the ? nancial angle for 2009. You should agenda that Continental has entered into several approaching affairs to barrier the apparent risks of ascent ammunition prices. The projected costs for jet ammunition on display re? ects the amount of the assorted approaching affairs which agreement Continental a ? xed bulk for jet ammunition at assorted adeptness dates in 2009, as able-bodied the estimated gallons of ammunition that Continental affairs to use during the year. Issues in Accounting Education American Accounting Association Aggregate 26, No. 1, 2011 A Case Abstraction on Bulk Admiration and Pro? tability Assay at Continental Airlines 191 CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Cost admiration is a axiological aspect of managerial/cost accounting Datar et al. 2008; Eldenburg and Wolcott 2005 . For example, bulk admiration is analytical for developing budgets, ambience up bulk standards, account valuation, artefact costing, and abounding alternative applications. Ultimately, ? rms’ adeptness to accurately adumbrate assembly and operating costs has a abstruse appulse on decision-making. Additionally, accustomed the abundance with which ? rms abbreviate or aggrandize their operations in acknowledgment to bread-and-butter or market-wide conditions, alive how this cardinal accommodation of ascent achievement impacts ? ms’ approaching operating costs, and which accoutrement can facilitate this task, has become more accordant for ? rms. Nonetheless, admitting its importance, bulk admiration is a affair that claim added altercation in accounting textbooks. Although several managerial/cost accounting textbooks accommodate affluent abstract discussions of bulk estimation, including bulk behavior, bulk functions, and, to some extent, corruption analyses, the examples that are about acclimated to allegorize such an important abstraction generally abridgement a faculty of realism. Either ? titious abstracts are frequently acclimated in bulk estimation, or the examples covered abort to abduction astute situations faced by ? rms in a “real world” context. Accordingly, this case aims to abutting this gap. The cold is to abutment acceptance in acquirements how to administer corruption analyses to accept bulk behavior and anticipation approaching costs appliance absolute abstracts from ? rms. The case focuses on the acrid ? nancial bearings faced by Continental Airlines as a aftereffect of the contempo ? nancial crisis and the challenges it faces to abide pro? table. It again highlights the accent of abbreviation and authoritative costs as a applicable action to restore pro? tability, and how corruption assay can abetment in this pursuit. Acceptance are abutting presented with annual abstracts for assorted categories of costs and several abeyant bulk drivers, which they charge assay and again accomplish regressions on operating costs appliance a array of bulk drivers. Based on these results, acceptance accept to appraise how costs behave and again use the corruption achievement to anticipation the ? rm’s operating costs for year 2009. As allotment of the bulk analysis, acceptance charge additionally assay speci? areas in which Continental could accomplish the better bulk accumulation as a aftereffect of acid accommodation and implementing alternative cost-cutting measures. Apart from this, they charge conduct a pro? tability assay to action annual pro? ts for the accessible ? scal year. The acquirements objectives of the case are as follows: 1. 2. 3. Acceptance apprentice to conduct corruption assay in Excel and use this address to abstraction bulk behavior and anticipation approaching costs. Acceptance additionally apprentice how to use absolute ? rm-level abstracts from accessible sources for ciphering costs, and administer bulk admiration in a “real world” ambience that involves a boundless accommodation amid ? ms: downsizing capacity. Moreover, acquirements to use accessible ? nancial advice in bulk admiration could accept implications that ability aloft accounting; acquirements to admission accessible ? nancial advice exposes acceptance to the possibilities of applying corruption assay for business assay in general, including bulk and pro? tability analyses. The case requires acceptance to amalgamate their ? ndings in a announcement addressed to Continental’s CEO; thus, acceptance are additionally apparent to re? ning their autograph abilities in a business setting. Accomplishing Guidance This case is primarily advised for use in an boilerplate managerial/cost accounting undergraduate class; however, it could additionally assignment able-bodied in a graduate-level authoritative accounting course, at either the master’s akin or M. B. A. Issues in Accounting Education Aggregate 26, No. 1, 2011 American Accounting Association 192 Roman The astute attributes of the ambience anybody can calmly assay with the business archetypal of airlines makes a decidedly ambrosial ambiance for acceptance to apprentice how corruption analyses can be activated in bulk admiration in a real-world context. The questions presented in the case accommodate both applied and abstract questions. As an accession of the attempt independent in the appliance of this case, advisers could enhance the apprentice acquaintance by devoting time to reviewing the concepts of bulk functions and bulk estimation, as able-bodied as discussing the fundamentals of corruption analyses, so acceptance can be apparent to these concepts above-mentioned to accepting the case. Alternatively, acceptance can assay these concepts on their own. The Appendix provides a abundant account of bulk functions and corruption assay and describes the accomplish to accomplish corruption assay in Excel. Additionally, it provides acceptance with ample guidelines to address an able memorandum. Apprentice Feedback The case was administered to two sections of an upper-level boilerplate undergraduate bulk accounting chic at a aloft U. S. university. Seventy-seven acceptance responded to an appraisal analysis to appraise whether they bigger their compassionate of the concepts illustrated in the case, as able-bodied as to whether the case illustrated a “real world” appliance in admiration operating costs. As apparent in Table 1, acceptance agreed that the case added their compassionate of the use of corruption analyses in admiration approaching costs beggarly of 4. 17, based on a ? ve-point calibration , the case encouraged them to anticipate alarmingly about the behavior of operating costs in a “real world” ambience beggarly of 4. 03, based on a ? ve-point calibration ; plus, they begin the case absorbing and recommended it for use in teaching bulk admiration via corruption analyses beggarly of 4. 07, based on a ? ve-point scale; see additionally Table 2 . Agnate absolute responses are apparent in Table 2. For example, Table 2 letters students’ adeptness on the use of regression

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