Question
Ms. Manju, the CEO of Setter Ltd., is examining the relationship between advertising cost and sales revenues of the companys audio products. Ms. Manju obtains
Ms. Manju, the CEO of Setter Ltd., is examining the relationship between advertising cost and sales revenues of the companys audio products. Ms. Manju obtains the following data for the past ten months:
Month | Revenues, $
| Advertising costs, $ |
1 | 50 000 | 2 000 |
2 | 70 000 | 3 000 |
3 | 55 000 | 1 500 |
4 | 65 000 | 3 500 |
5 | 55 000 | 1 000 |
6 | 65 000 | 2 000 |
7 | 45 000 | 1 500 |
8 | 80 000 | 4 000 |
9 | 55 000 | 2 500 |
10 | 60 000 | 2 500 |
Ms. Manju did a regression analysis and found the regression equation as follows:
Monthly revenues= $39,502 + $(8.723 x advertising costs)
Required (show all the workings):
(a) | Define the cost equation using the High-Low method. | (10 marks) |
(b) | Estimate the increase of revenues, for each $1,000 spent on advertising within the relevant range, using the High-Low method. | (5 marks) |
(c) | Estimate the increase of revenues, for each $1,000 spent on advertising within the relevant range, using the regression method. | (5 marks) |
(d) | Compare the results of the High-Low and the regression method and give your recommendation on the method Ms. Manju should use to predict the monthly revenues and why. | (5 marks) |
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