59 A manufacturer forecasts labor cost LabCost by the number

59. A manufacturer forecasts labor cost, LabCost, by the number of workers, NWorkers:

LabCost = ß0 + ß1 NWorkers +

In which of the following situations will increased forecasting error not occur?

a. Company health care insurance costs increase

b. Higher paid workers are hired to operate the new equipment

c. Company starts free college tuition plan

d. More part-time workers hired unqualified for pension plan

e. Increased forecasting errors are likely for all of these

Solution

(e) Increased forecasting errors are likely for all of these.

LabCost = ß0 + ß1 NWorkers +

In each of the cases the model changes, as ß0 and ß1 change. Thus, forecasting based on old model will result increased error.

Another way to visualize this is that in addition to the error produced by the model itself, forecasting error will now also result from variations in other variables e.g. cost of health care insurance, variations in salary of higher paid workers hired to operate new machines, college tuition fees paid, or number of workers unqualified for pension plan. As these variables are now allowed to vary, the error associated with forecasting increases.