The forecasting staff for the Prizer Corp has developed a model to predict sales

Question

The forecasting staff for the Prizer Corp has developed a model to predict sales of its air cushioned ride snowmobiles. The model specifies that sales S vary jointly with disposable personal income Y and the population between ages 15 and 40 Z, and inversely with the price of snowmobiles P. Based on past data, the best estimate of this relationship is S= k YZ/P where k has been estimated ( with past data) equal to 100 1. If Y= $11,000, Z=$1200 and P=20000, what value would you predict for S? 2. What happens if P is reduced to $17500? 3. How would you go about developing a value for k? 4. What are the potential weakness of this model?

Explanation / Answer

Since S=k*Y*Z/P 1) at k=100,Y=11,000 ,Z=1200 and P=20,000 S =100*11,000*1,200/20,000 = $ 66,000 (answer) 2) when P=$17,500 then S =100*11,000*1,200/17,500 =$75,428.57 increase in Sales = 75,428.57-66,000 =$9,428.57 so sales will increase by $9,428.57 (answer) 3) for determining the the value of k ,we will collect the past data of S,Y,Z and P. From that data we will find out the value of k using various forecasting techniques e.g regression analysis. k value will be that which is having minimum standard error. 4) with this model we have 3 parameters which can affect the predicted sales. so with slight change in any of the parameters can cause variations and it is difficult to find out which one out of 3 is varying.

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