High-Low and Scatter Diagrams with Implications for Regression (LO2, 3)

Trumpet Bagels produces and sells bagels at each of its restaurants. Presented is monthly cost and sales information for one of Trumpet’s restaurants.

Month Sales (Dozens) Total Costs JENUEINs coarmot eeae 8,000 $28,800 ReEDIUahVatert. staat ss. 6,500 26,400 Mare Ritetattae teeert 4,500 20,400 ADE ll Peeestar tSe eeina i. 2,000 19,200 WAVER ieee rete iir6cc usit h sr 5,500 21,600 SUING Perera cectd a cin tule kent cne 6,000 23,400 Required

a. Using the high-low method, develop a cost-estimating equation for total monthly costs.

b. — 1.Plot the equation developed in requirement (a).

2.Using the same graph, develop a scatter diagram of all observations for the bagel shop. Select representative high and low values and draw a second cost-estimating equation.

c. Which is a better predictor of future costs? Why?

d. If you decided to develop a cost-estimating equation using least-squares regression analysis, should you include all the observations? Why or why not?

e. Mention two reasons that the least-squares regression is superior to the high-low and scatter diagram methods of cost estimation. (p. 71)