High-low method; regression analysis. (CIMA, adapted) Anna Martinez, the financi

Question

High-low method; regression analysis. (CIMA, adapted) Anna Martinez, the financial manager at the Casa real restaurant, is checking to see if there is any relationship between newspaper advertising and sales revenues at the restaurant. She obtains the following data for the past 10 months:

Month Revenues Advertising cost
March $50,000 $2,000
April 70,000 3,000
May 55,000 1,500
June 65,000 3,500
July 55,000 1,000
August 65,000 2,000
September 45,000 1,500
October 80,000 4,000
November 55,000 2,500
December 60,000 2,500

she estimates the following regression equation:
Monthly revenues = $39,502 + ($8.723 x advertising costs)
Required
1. Plot the relationship between advertising costs and revenues.
2. Draw the regression line and evaluate it using the criteria of economic plausibility, goodness
of fit, and slope of the regression line.
3. Use the high-low method to compute function , relating advertising costs and revenue.
4. Using (a) the regression equation and (b) the high-low equation, what is the increase in revenuew
for each $1,000 spent on advertising within the relevant range? Which method should Martinez
use to predict the effect of advertising costs on revenues? Explain briefly.

Explanation / Answer

Revenues =$46,667 + (8.333

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