1 Finley Heaters Inc is a mid sized manufacturer of resident

1. Finley Heaters Inc. is a mid sized manufacturer of residential water heaters. Sales have grown during the last several years, and the company’s production capacity needs to be increased. The company’s management wonders if national housing starts might be a good indicator of the company’s sales.

Year

National Housing Starts (millions)

Finley Heaters’ Annual Sales (millions of dollars)

1

6.2

57

2

5.1

59

3

6.5

65

4

7.9

78

5

6.3

72

6

7.4

80

7

7.0

86

Using POM develop a simple linear regression analysis between Finley Heaters’ sales and national housing starts. Forecast Finley Heaters’ sales for the next two years. The National Home Builders Association estimates that national housing starts will be 7.1 million and 8.0 million for the next two years.

What percentage of variation in Finley Heaters’ sales is explained by national housing starts?

Would you recommend that Finley Heaters management use forecast from Part a to plan facility expansion? Why or why not? What could be done to improve the forecast?

Solution

Sol)

The Regression equation is y=a+bx

where x is National housing starts and y is finley heaters

From Excel

The fitted regression eqation is y=9.68 + 9.25 (National Housing Starts)

Now when x= 7.1 million then

y= 9.68 + 9.25(7.1)

y= 75.35

Now when x= 8 million then

y= 9.68 + 9.25(8)

y=83.68

Forecasted Finley Heaters’ sales for the next two years are 75.35 and 83.68

B)

Since R² value= 0.5838

Hence 58.38% of variation in Finley Heaters’ sales is explained by national housing starts