PermaPictures uses computer-guided lasers to etch pictures from photographs on granite. The firms management advertises heavily because

PermaPictures uses computer-guided lasers to etch pictures from photographs on granite. The firm’s management advertises heavily because it believes that advertising and product recognition is a key factor in generating sales. The following data pertain to the previous eight quarters of operations:

Required:
a. Plot the relation between advertising costs (y-axis) and sales revenue (x-axis). Does the relation between advertising costs and sales revenue appear to be linear?
b. Using Excel, estimate the following regression equation: Advertising Costs = Fixed costs + (UVC × Sales Revenue). That is, use sales revenue as the cost driver for advertising costs.
c. Using the regression equation you developed in part (b), estimate PermaPictures' advertising costs for a sales volume of $1,750,000. Comment on the validity of this estimate and, more generally, on the validity of the underlying cost equation being estimated.

Transcribed Image Text:

Advertising Costs $200,000 $225,000 $240,000 $275,000 $180,000 $220,000 $210,000 $230,000 Sales Revenue $1,235,000 $1,369,000 81,403,000 $1,408,000 $1,132,000 S1,212,000 $1,260,000 $1,345,450