Class 20.

Hightower
Department Store

Introduction to
Regression

What we will cover today

What is a regression line?
What are two ways to find the equation of a
simple linear regression line (if you have
data)?
What gets regressed on what and why?
How to use the regression line to construct
a point forecast?
What additional assumptions/information
do we need to make a probability forecast?

Case Facts
Chain of 16 US department stores
In Late January, Julia Brown went to
Germany to select and order stuffed animals
to be sold in Hightower Department Stores
during the Holiday season.
For borderline animals, Brown ordered a
limited quantity, offered them for sale in
only one store, and used/not used them the
following year based on how they tested.

2011 Test Animals

Leftover
units are
sold to
TJMaxx for
80% of
landed cost.

Animal

Landed
Cost

Retail
Price

Units
Purchase
d

Units Sold

Closeout
Inventory

Bear

$10.86

$24.95

50

10

40

Pig

$12.46

$26.95

50

46

Raccoon

$12.96

$26.95

50

32

18

Which animal(s)
should she
adopt for
2012?

If adopted, how
many units will
be sold?

Past Test Results

Year
2000
2001
2001
2002

Animal Landed Cost

Ape
$3.50
Bear
$4.80
Dragon
$3.90
Bird
$4.13

Price
$7.95
$8.95
$7.95
$8.95

Test Sales
27
19
14
7

Actual Sales
304
374
234
144

2003
2003
2004
2005
2005
2006
2006
2006

Rabbit
Bear
Dog
Elephant
Cat
Bear
Monkey
Dinosaur

$4.55
$5.15
$4.92
$4.57
$5.41
$6.71
$7.64
$4.76

$9.95
$10.95
$9.95
$11.95
$11.95
$14.95
$16.95
$9.95

6
8
12
11
30
13
10
14

133
209
140
458
245
208
308

2007
2007
2008
2009
2009
2009
2010
2010

Skunk
Mouse
Raccoon
Bear
Alligator
Dog
Monkey
Bear

$5.61
$8.90
$7.88
$8.07
$11.08
$9.62
$11.36
$10.15

$9.95
$19.95
$15.95
$17.95
$21.95
$19.95
$24.95
$22.95

4
7
16
23
8
15
8
10

47
244
385
269
243
146
259

The
challenge:
Use test
sales to
predict
Actual
Sales.

2003
Rabbit
and 2007
Skunk.
What to
do with
them?

Lets go to Excel
What we do will be posted.

Regression..the tool to use to draw a

line through a cloud of points
We regress Actual Sales on Test Sales
The regression line is the line that minimizes
sum of squared errors.
There is only one
line that minimizes
Error = Actual Predicted
SSE
Predicted is the prediction from the regression line.

Data Analysis, Regression gives us the

equation of the regression line.and much
more.
You can also get the equation of the regression line
by right clicking on the chart.

To Use the regression line to make a

point forecast
Just plug the known X-value (here X
is test sales) into the equation of the
regression line.
Point forecast for the bear which had
test sales of 10 units is
= 68.088 + 12.398*10
Under certain
assumptionsthis is the
= 192.1 units.
mean of Y
Point
forecast

Predicte
dY

What we covered today

What is a regression line?
What are two ways to find the equation of a
simple linear regression line (if you have
data)?
What gets regressed on what and why?
How to use the regression line to construct
a point forecast?
What additional assumptions/information
do we need to make a probability forecast?

Assignment 22
No class Monday (no Sunday office
hours)
Assignment 22 due Wed (Tuesday
evening office hours)
Assignments are 35% of course grade
(more than any exam). Drop lowest two.

Happy Easter.safe travels.