ABSTRACT: This case exposes students to the application of regression analyses to be used as a tool pursuant to understanding cost behavior and forecasting future costs using publicly available data from Continental Airlines. Specifically, the case focuses on the harsh financial situation faced by Continental as a result of the recent financial crisis and the challenges it faces to remain profitable. It then highlights the importance of reducing and controlling costs as a viable strategy to restore profitability and how regression analysis can assist in this pursuit. Students are next presented with quarterly data for various categories of costs and several potential cost drivers, which they must use to perform regressions on operating costs using a variety of cost drivers. They must then use their regression results to forecast operating costs and conduct a profitability analysis to project quarterly profits for the upcoming fiscal year. Finally, students must summarize the main results of their analysis in a memorandum addressed to Continental’s management, providing recommendations to restore profits. In particular, the concept of mixed cost functions is reinforced, as is the understanding of the steps required to perform regression analysis in Excel, interpreting the regression output, and the underlying standard assumptions in regression analysis. The case has been tested and well received in an intermediate cost accounting course and it is suitable for both undergraduate and graduate students.
Research Article| February 01 2011
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Francisco J. Roma´n; A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines. Issues in Accounting Education 1 February 2011; 26 (1): 181–200. doi: https://doi.org/10.2308/iace.2011.26.1.181
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