Question

A company produces the financial results shown in the table below. The executives at the firm have good reason to believe that $10.3 million in sales will be generated in 2010. Using a simple linear regression model, forecast the amount of profit they might expect in 2010. Be sure to compute the associated R-squared value and provide a related managerial interpretation of it.

Year	Sales Totals (in millions)	Profit Totals (in millions)
1998	$7.0	$0.15
1999	$2.0	$0.10
2000	$6.0	$0.13
2001	$4.0	$0.15
2002	$14.0	$0.25
2003	$15.0	$0.27
2004	$16.0	$0.24
2005	$12.0	$0.20
2006	$14.0	$0.27
2007	$20.0	$0.44
2008	$15.0	$0.34
2009	$7.0	$0.17

Answer 1

Use the following computation to get the estimates for slope, intercept, and the R-squared value.

So,

The regression equation will be written as follows:

Profit = 0.05060 + 0.01593 * Sales

So, if Sales = 10.3 million, Profit = 0.05060 + 0.01593*10.3 = $0.215 million

The R-squared value of 0.8403. This means that 84.03% of the total variations of 'Profit' can be explained by 'Sales' using the above model.