10-32

High-low method; regression analysis.(CIMA, adapted) Anna Schaub, the financial manager at the Mangiamo 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	$51,000	$1,500
April	72,000	3,500
May	56,000	1,000
June	64,000	4,000
July	56,000	500
August	64,000	1,500
September	43,000	1,000
October	83,000	4,500
November	56,000	2,000
December	61,000	2,000

She estimates the following regression equation:

Monthly revenues = $46,443 + ($6.584 Advertising costs)

• 1.Plot the relationship between advertising costs and revenues. Also draw the regression line and evaluate it using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
• 2.Use the high-low method to compute the function relating advertising costs and revenues.
• 3.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 Schaub use to predict the effect of advertising costs on revenues? Explain briefly.