Question

Serial Case

1. C6-72Calculate and compare cost estimates using high-low and regression methods (Learning Objectives 4 & 5)

This case is a continuation of the Caesars Entertainment Corporation serial case that began in Chapter 1. Refer to the introductory story in Chapter 1, here for additional background. (The components of the Caesars serial case can be completed in any order.)

Caesar Entertainment Corporation’s Form 10-K contains a variety of data in addition to financial statements. Below is a list that contains Caesars’ food and beverage costs (adapted) taken from its Statements of Operations for the past 22 years. In addition, the number of hotel rooms and suites owned by Caesars at the end of each of those 22 years has been gathered from other information provided in the Form 10-Ks.

Year ended	Food and beverage costs	# of hotel rooms & suites
12/31/2014	$ 694,000,000	39,218
12/31/2013	$ 639,000,000	42,200
12/31/2012	$ 634,000,000	42,710
12/31/2011	$ 665,700,000	42,890
12/31/2010	$ 621,300,000	42,010
12/31/2009	$ 596,000,000	41,830
12/31/2008	$ 639,500,000	39,170
12/31/2007	$ 716,500,000	38,130
12/31/2006	$ 697,600,000	38,060
12/31/2005	$ 482,300,000	43,060
12/31/2004	$ 278,100,000	17,220
12/31/2003	$ 255,200,000	14,780
12/31/2002	$ 240,600,000	14,551
12/31/2001	$ 232,400,000	13,598
12/31/2000	$ 228,000,000	11,562
12/31/1999	$ 218,600,000	11,760
12/31/1998	$ 116,600,000	11,685
12/31/1997	$ 103,600,000	8,197
12/31/1996	$ 95,900,000	6,478
12/31/1995	$ 91,500,000	5,736
12/31/1994	$ 82,800,000	5,367
12/31/1993	$ 76,500,000	5,348
Caesars Entertainment Corporation Selected data from Form 10-K (adapted)

Requirements (use excel)

1. Using the high-low method, find the following cost estimates:
   1. Variable food and beverage cost per hotel room/suite
   2. Fixed food and beverage cost per hotel room/suite
2. Perform a regression analysis using Excel. Use # of hotel rooms & suites as the X and the Food and beverage costs as the Y in your regression analysis.
   1. What is the estimated variable food and beverage cost per hotel room/suite?
   2. What is the estimated fixed food and beverage cost per hotel room/suite?
   3. In your opinion, is the number of hotel rooms and suites a good predictor of Caesars’ food and beverage costs? Why or why not?

Answer 1

High-low method

a. Variable Cost per unit = ($482300000 - 76500000) / (43060 - 5348) = $10760.50 per room

b. Fixed Cost = $482300000 - 43060 x 10760.50 = $18,952,870

Regression Analysis

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.967549051
R Square	0.936151166
Adjusted R Square	0.932958724
Standard Error	64792547.67
Observations	22
ANOVA
	df	SS	MS	F	Significance F
Regression	1	1.23E+18	1.23E+18	293.2399	2.04E-13
Residual	20	8.4E+16	4.2E+15
Total	21	1.32E+18
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	10021329.08	25746408	0.389232	0.701218	-4.4E+07	63727395	-4.4E+07	63727395
X Variable 1	15283.50	892.5063	17.12425	2.04E-13	13421.76	17145.23	13421.76	17145.23

a. Variable Cost per room = $15283.50 per room

b. Fixed Cost = $10,021,329

c. R Square is 0.94 or 94% which explains 94% of the variability, therefore number of hotel rooms is a good predictor