Chapter 3, Problem 40P

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 definitions of the variables used in the four equations and a statistical summary of these equations:

$\begin{array}{c}{S}_t=\text{Forecasted sales in dollars for Lockit in period }t\\ S_{t-1}=\text{Actual sales in dollars for Lockit in period }t-\text{1}\\ G_t=\text{Forecasted U}\text{.S}\text{. gross domestic product in period }t\\ G_{t-1}=\text{Actual U}\text{.S}\text{. gross domestic product in period }t-1\\ N_{t-1}=\text{Lockit’s net income in period }t-1\end{array}$

Required:

1. 1. Write Equations 2 and 4 in the form Y = a + bx.
2. 2. If actual sales are $1,500,000 in the current year, what would be the forecasted sales for Lockit in the coming year?
3. 3. Explain why Larry Husky might prefer Equation 3 to Equation 2.
4. 4. Explain the advantages and disadvantages of using Equation 4 to forecast sales.