Financial Planning and Forecasting: Using Regression to Improve Forecasts Regres

Question

Financial Planning and Forecasting: Using Regression to Improve Forecasts Regression analysis is a statistical technique that fits a line to observed data points so that the resulting equation can be used to forecast other data points. It is useful in excess capacity and economies of scale situations Economies of scale occur when the ratio of asset to sales will change as the size of the firm increases. Regression analysis can lead to improved financial forecasts and better information which can be used to improve management's actions. uantitative Problem: Jasper Jewelry has $130 million in sales. The company expects that its sales will increase 5% this year Jaspers CFO uses a simple linear regression to forecast the company's given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows: ventory eve o Inventories $11 +0.08(Sales) Given the estimated sales forecast and the estimated relationship between inventories and sales, what is your forecast of the company's year-end inventory level? Round your answer to two decimal places. Do not round intermedlate calculations million

Explanation / Answer

Sales = 1.05*130 million = $136.5 million

Inventories = 11 + 0.08*136.5 = $21.92 million

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