Regression analysis is a statistical technique that fits a line
to observed data points so that the resulting equation can be used
to forecast other data points. It is useful in excess capacity and
economies of scale situations. Economies of scale occur when the
ratio of asset to sales will change as the size of the firm
increases. Regression analysis can lead to improved financial
forecasts and better information which can be used to improve
management’s actions.
Quantitative Problem: Jasper Jewelry has
$140 million in sales. The company expects that its sales will
increase 4% this year. Jasper’s CFO uses a simple linear regression
to forecast the company’s inventory level for a given level of
projected sales. On the basis of recent history, the estimated
relationship between inventories and sales (in millions of dollars)
is as follows:
Inventories = $9 + 0.07(Sales)
Given the estimated sales forecast and the estimated
relationship between inventories and sales, what is your forecast
of the company’s year-end inventory level? Enter your answer in
millions. For example, an answer of $10,550,000 should be entered
as 10.55. Do not round intermediate calculations. Round your answer
to two decimal places.
$ million
