In this exercise, we will look at some costs and see if we can determine the type of behavior associated with those costs. While firms are concerned about trying to label costs as either variable or fixed to help in planning, very few costs are completely variable or fixed. The information provided by firms to external users also often precludes a user from determining specifics about the cost behaviors—they don’t want to give the competitors too much information!

Log on to the Southwest Airlines Web site at www.southwest.com. Click on the information icon “About Southwest,” and then click on “Investor Relations.” This will take you to the site where you can then access the financial information.

1. Click on the most recent “Southwest Airlines One Report” tab. Then click on the "performance" tab, then "past performance," and find the page where the 10-year summary starts. Go to this section of the report. What type of information do you find there?

2. When you look at the operating revenue information, what do you see? Look at the information provided concerning operating expenses. Is it categorized in the same manner as the revenues? If the information is not in the same categories, why do you think Southwest did not match it up in the same manner?

3. Now look at the section on consolidated operating statistics. Southwest measures activity in revenue passenger miles (RPMs) and capacity in available seat miles (ASMs). Which of these is larger?

How are the RPM and ASM determined? Is it possible for the two numbers to be the same? What information is provided for each of these items in the consolidated operating statistics section?

4. Using data from 2008 through 2011 and employing the high-low method, compute the fixed operating expense per year and the variable operating expense per RPM. Assume that half of the increase in operating expenses between 2008 and 2011 represents increases in fuel prices, which should be omitted from the analysis. Compare the total operating expense after omitting the increase caused by higher fuel prices and the variable expense for 2011. Is this relationship what you expected? Why or why not?

5. Airlines are often considered to be high-fixed-cost companies. Is this consistent with your findings in requirement 4? Explain why the high-low method this time might overestimate the amount of variable costs.