High-Low and Scatter Diagrams with Implications for Regression

Midnight Cookie Company produces and delivers gourmet cookies and ice cream until 1:30 a.m. from its three Seattle area locations. Presented is monthly cost and sales information for cookies at one of Midnight's locations.

Month Sales (Dozens) Total Costs

January. . . . . . . . . . . . . . . . . . . . .6,800 . . . . . . . . . . . . . . . . . .$30,650

February . . . . . . . . . . . . . . . . . . . 7,800. . . . . . . . . . . . . . . . . . 35,336

March. . . . . . . . . . . . . . . . . . . . .5,500 . . . . . . . . . . . . . . . . . . 29,700

April. . . . . . . . . . . . . . . . . . . . . .1,000 . . . . . . . . . . . . . . . . . . 25,000

May. . . . . . . . . . . . . . . . . . . . . . . 6,100 . . . . . . . . . . . . . . . . . . 30,600

June. . . . . . . . . . . . . . . . . . . . . . 4,500 . . . . . . . . . . . . . . . . . .28,670

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

cookieshop. 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