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# MGS3100: Exercises – Forecasting

1. Consider the following selected regression output for predicting Y based on Age:

## Coefficients Standard Error t Stat P-value

Intercept -1.1759 2.063543871 -0.5699 0.581
Age 0.6120 0.139124099 4.3992 0.001

## What is the of value Ŷ when Age = 20?

a. -26.35
b. -22.90
c. 11.06
d. 10.08
e. none of the above

2. Below is the output report for a regression analysis that relates a company’s Sales to
Innovation Spending.

SUMMARY OUTPUT

Regression Statistics
Multiple R
R Square ?
Square
Standard Error 2.50
Observations 14

ANOVA
df SS MS F Significance F
Regression 1 424.450 424.450 67.885 0.00001
Residual 12 75.030 6.253
Total 13

## Coefficients Standard t Stat P-value

Error
Intercept 67.684 2.230 15.908 0.003
Innovation 3.174 0.362 5.006 0.001

## 1) Based on the output above, R Square of the model is:

a. 0.603
b. 0.874
c. 0.761
d. 0.850
e. 0.803

2) Which of the following statements is correct?

## a. If the company spends additional \$1 on innovation, sales decrease on average by

\$67.684.
b. If the company spends additional \$1 on innovation, innovation increases on average by
\$67.684.
c. If the company spends additional \$1 on innovation, sales decrease on average by \$3.174.
d. If the company spends additional \$1 on innovation, sales increase on average by \$3.174.

3. Answer the following questions pertaining to the attached regression output below. The
regression was performed to predict the Sales based on the Income.

## 1) What is the regression equation?

2) Interpret the value of the coefficient for Income (X).
3) How much of the variability in Sales is explained by the model?
4) How is R-Squared computed?
5) Is the overall regression model significant?
6) Is there a significant trend?
7) Predict the Sales for income equal to 17 and 18, respectively.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.8808
R Square 0.7758
Standard Error 48.8155
Observations 16

ANOVA
df SS MS F Significance F
Regression 1 115424.56 115424.56 48.44 0.00
Residual 14 33361.38 2382.96
Total 15 148785.94

## Coefficients Standard t Stat P-value Lower 95% Upper 95%

Error
Intercept -15.7863 44.0015 -0.3588 0.7251 -110.1603 78.5877
Income 4.1920 0.6023 6.9597 0.0000 2.9001 5.4838

4. Consider the regression output to predict Sales (\$ thousands) based on Ad Expenses, Bonus,
and Sales Force.

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.997263
R Square
Standard Error 16.97083
Observations 13

ANOVA
Significance
df SS MS F F
Regression 3 157212.9 545.8608 1.7E-10
Residual 9 2592.082 288.0091
Total 12 474230.8

## Standard Lower Upper

Coefficients Error t Stat P-value 95% 95%
Intercept -119.706 53.41416 -2.24109 0.051751 -240.537 1.125297
Ad Expense (\$000) 22.38734 9.269338 2.415203 0.038916 1.418637 43.35604
Bonus (\$) 0.572689 0.228156 2.510083 0.033306 0.056566 1.088813
Sales Force 66.85939 12.28413 5.442745 0.00041 39.07076 94.64803

1) Based on the above sales multiple regression model, write the regression equation.
2) Compute Regression SS.
3) Compute R square.
4) Predict Sales when Ad Expense is \$ 15000, Bonus is \$200, and there are 35 people in the
sales force.

5. For the following set of forecasts (17, 20, 25, 31, 39) and actual values (19, 24, 28, 32, 38),
a. 2.2
b. 2.5
c. 2.8
d. 3.1
e. 3.4

6. Three forecasting models, all using the same data set, are being compared using their MAD
values. The MAD value for Model X is 25.6; Model Y is 20.4; Model Z is 15.2. Which
forecasting model is considered the best?
a. Model X
b. Model Y
c. Model Z
e. The MAD cannot be used to determine which model is best.

7.    Increasing the number of periods in a moving average does not necessarily increase the
accuracy of the forecast. (True/False)

8. Forecast using the following methods: Naïve, 2-period MA (moving average),
3-period MA, and Exponential Smoothing with alpha = 0.35
Find BIAS, MAD, MAPE, and MSE for each forecasting method.

1) Naïve Method
Period Sales Forecast Error Abs Error % Error Squared Error
1 7 N/A
2 6
3 8
4 6
5 8
6

## 2) Two-period moving average

Period Sales Forecast Error Abs Error % Error Squared Error
1 7 N/A
2 6 N/A
3 8
4 6
5 8
6

## 3) Three-period moving average

Period Sales Forecast Error Abs Error % Error Squared Error
1 7 N/A
2 6 N/A
3 8 N/A
4 6
5 8
6

4) Exponential smoothing
alpha = 0.35
Period Sales Forecast Error Abs Error % Error Squared Error
1 7 N/A
2 6
3 8
4 6
5 8
6

9. If actual sales for a time period are 2400 units and the seasonal index for this time period is
1.2, find the deseasonalized sales for this period.
a. 2880
b. 1021.2
c. 1080.3
d. 1108.8
e. 2000

10. The seasonal factors (also known as indices) for the first three quarters for the demand of
snow blowers are 2.5, 0.1, 0.1. What is the seasonal factor for quarter 4?
a. 3
b. 1.3
c. 1
d. -1.3
e. 3.1

11. The Sales trend has been modeled as: Sales = 3t + 100, where t = time in quarters, beginning
in Q1 2005. Seasonality for the four quarterly periods is given in the table below. Find the
seasonalized forecast for Q4 of 2007.

## Quarter Seasonal Factor

Quarter #1 0.9522
Quarter #2 1.0000
Quarter #3 0.9888
Quarter#4

a. 136.00
b. 113.18
c. 126.95
d. 139.04
e. 144.02

Solutions
1. c). The prediction equation is Ŷ = -1.1759 + 0.6120 * Age. By plugging Age = 20 into the
equation, the answer is Ŷ = -1.1759 + 0.6120 * 20 = 11.06.

2. 1) d). R Square = RSS/TSS. By using RSS = 424.450 and TSS = 424.450 + 75.030 = 499.48,
2) R Square = 424.450 / 499.48 = 0.8497.
3) d.

## 3. 1) Yˆ = -15.78 + 4.19X, based on the output.

2) Coefficient of X is the average change in Y for a unit change in X. Here it means that for
every unit income increase, sales will increase by 4.192.
3) 77.58%, which is the R-squared value.
4) It is computed by RSS/TSS=115424.56/148785.94.
5) Yes, because significance of F is 0.000, which is lower than an alpha of 0.05.
6) Yes, because the p-value for income is 0.0000.
7) At x=17, y = 17*4.19 -15.78 = 55.45 , and at x=18, y = 59.67

## 4. 1) Predicted Sales = -119.706+22.39*Ad Expense +0.57*Bonus+66.86*Sales Force.

2) 471638.7. RSS = TSS – ESS = 474230.8 – 2592.1 = 471638.7.
3) 0.9945. R square = RSS/ TSS = 471638.7 / 474230.8 = 0.9945.
4) Predicted Sales = -119.706 + (22.39 * 15) + (0.57 * 200) + (66.86 * 35) = \$ 2,670.24
thousands, or \$ 2,670,240.

5. a.
Actual Forecast Error Abs Error
19 17 2 2
24 20 4 4
28 25 3 3
32 31 1 1
38 39 -1 1

## 6. c. model Z because it has the lowest MAD.

7. True.

8.
= 6 - 7 = -1
Error = Yt − Ft
1) Naïve Method
Period Sales Forecast Error Abs Error % Error Error^2
1 7 N/A =1/6=0.1667
2 6 7 -1 1 16.67% 1
3 8 6 2 2 25.00% 4
Ft = Yt −1
4 6 8 -2 2 33.33% 4
5 8 6 2 2 25.00% 4
0.25 1.75 25.00% 3.25
= Average of Errors
= (-1 + 2 + (-2) + 2) / 4
=1/4
2) 2-period moving average = 0.25

## Period Sales Forecast Error Abs Error % Error S. Error

1 7 N/A
2 6 N/A
Yt −1 + Yt − 2
3 8 6.5 1.5 1.5 18.75% 2.25 Ft =
4 6 7 -1 1 16.67% 1 2
5 8 7 1 1 12.50% 1
0.50 1.17 15.97% 1.417
= (7+ 6) / 2
= 13 / 2
= 6.5

## 3) 3-period moving average

Period Sales Forecast Error Abs Error % Error S. Error
1 7 N/A
2 6 N/A Yt −1 + Yt − 2 + Yt −3
3 8 N/A Ft =
3
4 6 7 -1.00 1.00 16.67% 1
5 8 6.66667 1.33 1.33 16.67% 1.78
0.167 1.167 16.67% 1.389
= (7 + 6 + 8) / 3
= 21 / 3
=7
4) Exponential smoothing
alpha = 0.35
Period Sales Forecast Error Abs Error % Error S. Error
1 7 N/A
2 6 7 -1 1 16.67% 1.00
3 8 6.65 1.35 1.35 16.88% 1.82 Ft = αYt −1 + (1 − α ) Ft −1
4 6 7.12 -1.12 1.12 18.71% 1.26
5 8 6.73 1.27 1.27 15.88% 1.61
0.124 1.186 17.03% 1.424

## = 0.35*8 + (1 - 0.35)*6.65 = 0.35*6 + (1 - 0.35)*7

= 2.8 + 4.3225 = 2.1 + 4.55
= 7.12 = 6.65

9. e. 2400/1.2 = 2000.

## 10. b. 4 – (2.5 + 0.1 + 0.1) = 1.3

11. e. S.I. for Q4 = 4 – (0.9522 + 1 + 0.9888) = 1.059. De-seasonalized forecast for Q4, 2007 is
found by plugging t = 12 in sales trend equation, sales = 3*12 + 100 = 136. Reseasonalized
forecast for the same quarter is = 136*S.I. for Q4 = 136*1.059 = 144.02.