Kelele Company Ltd. manufacturers crockery. The company is considering the use of simple and multiple linear regression analysis to forecast annual sales for they are 2001 because previous forecasts have been inaccurate. The sales forecast will be used to initiate the budgeting process and to identify more accurately the underlying process that generates sales.

Kelele Company Ltd. manufacturers crockery. The company is considering the use of simple and multiple linear regression analysis to forecast annual sales for they are 2001 because previous forecasts have been inaccurate. The sales forecast will be used to initiate the budgeting process and to identify more accurately the underlying process that generates sales. The financial controller of the company has considered many possible independent variables and equations to predict sales and has narrowed his choices to four equations. He used annual observations from twenty prior years to estimate each of the four equations. The following is a statistical summary of the four equations and definitions of the variables used in the exercise. Dependent variable Independent variable Intercept Coefficient of independent variable T-statistic Standard error of estimate Coefficient of determination (sh) (sh) Equation I Yt Yt 1 2,500,000 Equation II Yt Zt 5,000,000 Equation III Yt Zt 1 4,500,000 Equation IV Yt Nt t Z t Z t t 3,000,000 5.5 11.00 2,500,000 0.94 0.00005 50.00 2,550,000 0.90 0.00006 25.00 2,600,000 0.81 * * 2,450,000 0.96 The other statistics for Equation IV were estimated as follows: Variable Coefficient T-statistic Where: Yt Nt - 1 Zt Zt - 1 50 0.00001 0.000015 20.00 7.50 15 = forecast sales (in shillings) for the company in time period t Yt - 1 = actual sales (in shillings) for period t - 1 Zt = forecast Kenya gross national product in time period t Zt - 1 = actual Kenya gross national product in time period t - 1 Nt - 1 = company's net income in time period t - 1 Required: a) Using the relationship T = a + bx, write Equations II and IV (3 marks) b) If the actual sales for the year 2000 were sh.7,500,00, what would be the forecast sales for the year 2001? (2 marks)