There is considerable debate within your firm concerning the effect of advertisi
ID: 3070200 • Letter: T
Question
There is considerable debate within your firm concerning the effect of advertising on sales. The marketing department believes advertising has a large positive effect; others are not so sure. For instance, the production and technical staffs believe the quality of the product itself largely determines sales. To clarify the debate, you have gathered the following data for the last 24 quarters (Unit Sales are measured in thousands of units sold and Advertising is measured in thousands of dollars spent on advertising). Your firm sells the product at $1.20 each.
Quarter Unit Sales Advertising
1 120 39
2 115 36
3 97 38
4 118 39
5 88 23
6 63 22
7 82 40
8 80 42
9 95 36
10 106 49
11 105 66
12 136 65
13 122 51
14 112 56
15 116 60
16 104 51
17 137 55
18 114 47
19 104 50
20 122 47
21 108 32
22 94 41
23 98 45
24 104 34
a. Does advertising affect unit sales? Base your answer on a regression analysis.
b. Is it worth spending an additional $1000 on advertising?
c. Others in the company argue that if we account for the last quarter’s sales, advertising has little effect on this quarter’s sales. Test this hypothesis via regression analysis. Hint: (a) As we do not know the Unit Sales before Quarter 1, you should conduct your analysis from Quarter 2 to 24. (b) You need to use multiple regression with two explanatory variables.
d. Based on the regression in part (c), is it worth spending an additional $1000 on advertising?
e. As the CEO, which regression model, the one in part (a) or (c), will you use?
Explanation / Answer
Using simple linear regression we may find whether advertising affects unit sales or not.
From the above table it is evident that advertising affect the unit sales (i.e) as advertising is increased by $1.00, sales will increase by 91.5 cents. The coefficient is statistically significant (t-stat is 3.06>2).
Using multiple regression with two explanatory variables
From the above table is statistically significant since significance F is 0.004.It is evident that advertising has increased the sales in last quarters,
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