Question 1

Anna Martinez, the financial manager at the Casa Real restaurant, is checking to see if there is any relationship between newspaper advertising and sales revenues at the restaurant. She obtained the following data for the past 10 months:

Month Revenues Advertising costs

R R March 50 000 2 000 April 70 000 3 000 May 55 000 1 500 June 65 000 3 500 July 55 000 1 000 August 65 000 2 000 September 45 000 1 500 October 80 000 4 000 November 55 000 2 500 December 60 000 2 500

Required:

1.1 Use the High-Low method to derive the cost function relating to advertising costs and revenues.

1.2 Run the regression on excel and derive the cost function relating to advertising costs and revenues. (Submit your excel book via email to a_dich@sun.ac.za).

1.3 Using the cost functions derived in 1.1 and 1.2 above, calculate the increase in revenues for each R1 000 spent on advertising.

1.4 Which method should Martinez use to predict the effect of advertising costs on revenues? Support your answer.