Question

2. Sunshine 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:

	National	Sunshine Heaters'
	Housing Starts	Annual Sales
Year	(millions)	(millions of dollars)
I	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

a. Develop a simple linear regression analysis between Sunshine Heaters' sales and national housing starts. Forecast Sunshine 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.

b. What percentage of variation in Sunshine Heaters' sales is explained by national housing starts?

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

Answer 1

(a)

(b)

(c)

The r² is fairly low. Only 58% of the variation is Sunshine's sales is expalined by National housing starts. It would probably be better if other variables could be brought into the forecasting model to help explain more of the variation in sales.