A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines
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 Study on Cost Estimation and
Profitability Analysis at Continental Airlines
Francisco J. Román
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.
Keywords: cost estimation; profitability analysis; cost behavior; regression analyses; cost functions.
Data Availability: All data are from public sources and are available in hard copy inside the case. Data are also
Vol. 26, No. 1
2011
pp. 181–200
American Accounting Association
DOI: 10.2308/iace.2011.26.1.181
A Case Study on Cost Estimation and
Profitability Analysis at Continental Airlines
Francisco J. Román
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.
Keywords: cost estimation; profitability analysis; cost behavior; regression analyses; cost functions.
Data Availability: All data are from public sources and are available in hard copy inside the case. Data are also
References: Datar, S., C. Horngren, G. Foster, and C. Ittner. 2008. Cost Accounting: A Managerial Emphasis. 13th edition. Englewood Cliffs, NJ: Prentice Hall. Eldenburg, L., and S. Wolcott. 2005. Cost Management: Measuring, Monitoring, and Motivating Performance. 1st edition. New York, NY: John Wiley and Sons. Maynard, M. 2008. Big airlines in a rush go small. The New York Times June 6 . Issues in Accounting Education American Accounting Association Volume 26, No. 1, 2011 Copyright of Issues in Accounting Education is the property of American Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder 's express written permission. However, users may print, download, or email articles for individual use.