Use the 2008 Form 10-K for Southwest Airlines to complete the requirements below. To obtain the Form 10-K you can use either the EDGAR system following the instructions in Appendix A, or it can be found under “Investor Relations” which is under the “About Southwest” link on the company’s corporate website, www.southwest.com. The company includes its Form 10-K as a part of its 2008 Annual Report. Be sure to read carefully the “Item 6. Selected Financial Data” section of the document.

Required

a. “Item 6. Selected Financial Data,” list data for several measures of activity. List the items from this table that might be used by Southwest as an activity base for CVP analysis.

b. Of the activity bases that you identified for Requirement a, which do you think would work best for performing CVP at Southwest? Explain the rationale for your choice.

c. Use the “Operating expense” and the “Revenue passenger miles” data from Item 6, to compute the variable cost and fixed cost components of operating expense using the high-low method presented in Chapter 2. Warning: the results you get will not seem reasonable, but perform the calculations and report your results.

d. Try to explain the peculiar results you obtained for Requirement c. This will require careful thought, and you may wish to review the Cost-Volume-Profit Limitations section of this chapter.

e. “Item 6.” reports that in 2008 Southwest’s “Load factor” was 71.2%. If this load factor could have been increased by 10% to 78.3%, do you think the company’s net earnings would have increased by less than 10%, 10%, or more than 10%? Explain.