Internet Exercises

www: IE5-27 Estimating Variable and Fixed Costs Carnival Corporation owns and operates a fleet of cruise ships. The company measures its activity in terms of passenger cruise-days. For example, a family of four on a five-day cruise is counted as 20 passenger cruise-days. Many of the expenses of cruise ships-for example, the costs of food served to passengers vary with the number of passenger cruise-days. By accessing Carnival Corporation's annual report in the Investor Relations section of their web site www.carnivalcorp.com, you can find information about their expenses and passenger cruise-days for the last three years. Operating Expenses, Selling and Administrative Expenses, and Depreciation and Amortization Expenses are listed in the company's income statement. The passenger cruise-days are listed in the section of the annual report called Management's Discussion and Analysis of Financial Condition and Results of Operations.

1. For each of the three categories of expenses listed above, do the following:

1. Plot the expense against passenger cruise-days.
2. Using the scattergraph method, estimate the fixed and variable components of the expense. Do you have much confidence in your estimates? Why or why not?
3. Using the high—low method, estimate the fixed and variable components of the expense. Do you have much confidence in this estimate? Why or why not?

1. Use what you believe to be the best estimates of fixed and variable costs from your analyses above to estimate how the total cost of the company varies with the number of passenger cruise-days. Express the relation in terms of the cost formula Y= a + bX, where Y is total cost and X is passenger cruise-days. (Ignore interest expense and income tax expense. Only include Operating Expenses, Selling and Administrative, and Depreciation and Amortization in the total cost.)