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Transcript of CH6Group_ACCT614_AR-brief
Chapter 6 Group: Jeff Henderson & Josh Kennedy
ACCT614 Applied Managerial Accounting: Professor Sandra Damron
October 31, 2013
Focuses on the harsh financial situation faced by Continental as a result of financial crisis and challenges it faced to remain profitable
Highlights importance of reducing and controlling costs as a viable strategy to restore profitability
Cost estimation fundamental aspect of managerial accounting
Cost predictions are used in each of the management functions
Determine desirability of alternative options
Budget expenditures, profits, and cash flows
2008; fourth largest airline in the U.S. and eighth largest in the world, Continental incurred operating loss of $71m (second consecutive quarterly earnings decline that year)
Passenger volume significantly down ~5% from prior year’s quarter
Unprecedented challenges for industry as world heads for severe economic recession
Downward trend in business and leisure travel which sharply reduces revenue
Price of jet fuel soars to record levels (surpasses firm’s salaries and wages as highest cost)
Management needs to act swiftly to restore profitability
Growing revenues by raising airfares or passenger volume seemed futile
Raising fares could erode future revenues
Discount fares could fall short in stimulating additional passenger demand
Restore profits with substantial and swift reduction in operating costs
Accomplished in two ways
Reduction in flying capacity adjusted to match projected passenger demand
Reduce flying capacity by 11% on domestic and international routes
Eliminate least profitable or unprofitable flights and, accordingly, ground several planes in the fleet
Implement several cost-cutting initiatives and capitalize on operational efficiencies
Consolidate several tasks during passenger check-in and reduce food and beverage waste served during flights
Reduce various miscellaneous expenses through targeted cuts in discretionary spending
To close the gap in profitability, Continental’s strategy was geared toward slashing operating costs
Identification and implementation of cost-cutting initiatives
Continental survives downturn and eventually merges with United in 2012
Román, F. J. (2011). A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines. Issues In Accounting Education, 26(1), 181-200. doi:10.2308/iace.2011.26.1.181
Hilton, R. W. (2011). Managerial Accounting: Creating Value in a Dynamic Business Environment. New York City: McGraw-Hill Irwin.