10-33 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 Costs
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 * Advertising costs)
1. Plot the relationship between advertising costs and revenues. Required
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 the function, relating advertising costs and revenues.
4. Using (a) the regression equation and (b) the high-low equation, what is the increase in revenues 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.