Problem 8-49 (Algo) Cost Estimation; High-Low Method; Regression Analysis [LO 8-3]

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Lexon Incorporated is a large manufacturer of affordable DVD players. Management recently became aware of rising expenses resulting from returns of malfunctioning products. As a starting point for further analysis, Paige Jennings, the controller, wants to test different forecasting methods and then use the best one to forecast quarterly expenses for 2022. The relevant quarterly data for the previous three years follow:

2019 Quarter	Return Expenses	2020 Quarter	Return Expenses	2021 Quarter	Return Expenses
1	$12,500	1	$12,900	1	$13,400
2	11,600	2	12,000	2	12,300
3	11,300	3	11,700	3	12,100
4	13,700	4	14,000	4	14,600

The result of a simple regression analysis using all 12 data points yielded an intercept of $11,854.55 and a coefficient for the independent variable of $126.22. (R-squared = 0.19, SE = $988.14.)

Part 2 (Algo)

Required:

2. Looking at the graph you prepared for requirement 1, select two representative data points and calculate the quarterly forecast for 2022 using the high-low method.

3. Calculate the quarterly forecasts for 2022 using the results of a regression analysis. Evaluate the results of the regression analysis and make appropriate changes to improve the model. (Hint: For Regression Two, use a dummy variable to incorporate seasonality into the model.)