Lisa Aoli, the financial manager at the Casa Real restaurant is working with Megan Dryden, the marketing manager, to establish if there is any relationship between the newspaper advertising expense and the sales revenue at the restaurant each month. The table below reports the actual data for the past 10 months.

Based on these data the two partners will compare the predicted revenue based on a linear relation which they have assumed depicts the economic substance of any systematic change in revenue due to a change in advertising expense. The specification will be Y = a + bX for the two methods based on actual data and y = a + bX+ e for the linear regression. The partners obtain their linear regression results in less than five minutes from Excel. Their account analyses take longer, but they determine that the fixed monthly revenue from longstanding and regular customers is $5,000. They want to predict revenue when the advertising expense X = $1,900.

REQUIRED
1. Determine the predicted total revenue using (a) account analysis, (b) high-low method and (c) the output from the linear regression.
2. Calculate the range within which the value of y when X = $1,900 is likely to fall.
3. Comment on the results of the OLS simple linear regression and begin with the data quality.
4. Would you recommend the use of the OLS simple linear regression results to predict monthly revenue?

Transcribed Image Text:

Advertising Expense October November December $28,200