Cost estimation approaches The industrial engineering, conference and account analysis methods require less historical data than do most quantitative analyses. Therefore, cost estimation fora new product will usually begin with one or more of these three methods. Quantitative analysis maybe adopted later, after the company gains experience (and the necessary data. Steps in estimating a cost function Remind students that the high–low method simply calculates the formula fora line, based on two data points. The concept is the same as in secondary school algebra. An important criticism of the high–low method is that it bases the cost function on only two data points – two that maybe extreme cases If students have learned regression, remind them of the following 1 The data should first be plotted to determine whether a linear relation exists. If not, anon- linear model should be estimated. 2 If the data span more than one RR, piece-wise regression (estimating a different function for each relevant range) is appropriate. 3 Regression minimises the sum of the squared deviations, so the reasons for and effect of extreme observations must be investigated.
