341 Words2 Pages

The Lockit Company manufactures door knobs for residential homes and apartments. Lockit is considering the use of simple (single-driver) and multiple regression analyses to forecast annual sales because previous forecasts have been inaccurate. The new sales forecast will be used to initiate the budgeting process and to identify more completely the underlying process that generates sales. Larry Husky, the controller of Lockit, has considered many possible independent variables and equations to predict sales and has narrowed his choices to four equations. Husky used annual observations from 20 prior years to estimate each of the four equations. Following are a definition of the variables used in the four equations and a statistical summary of these equations:
St = Forecasted sales in dollars for Lockit in period t
St–1 = Actual sales in dollars for Lockit in period t – 1
Gt = Forecasted U.S. gross domestic product in period t
Gt–1 = Actual U.S. gross domestic product in period t – 1
Nt–1 = Lockit’s net income in period t – 1
Required:
1. Write Equations 2 and 4 in the form Y = a + bx.
2. If actual sales are $1,500,000 in 2009, what would be the forecasted sales for Lockit in 2010?
3. Explain why Larry Husky might prefer Equation 3 to Equation 2.
4. Explain the advantages and disadvantages of using Equation 4 to forecast sales.
[pic]
.:.
(CMA adapted)
SOLUTION:
1. Equation 2: St = $1,000,000 + $0.00001Gt
Equation 4: St = $600,000 + $10Nt–1 + $0.000002Gt + $0.000003Gt–1
2. To forecast 2010 sales based on 2009 sales, Equation 1 must be used:
St = $500,000 + $1.10St–1
S2010 = $500,000 + $1.10($1,500,000) = $2,150,000
3. Equation 2 requires a forecast of gross domestic product. Equation 3 uses the actual gross domestic product for the past year and, therefore, is observable.
4. Advantages: Using the highest R2, the lowest

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