Question.

5 Allegheny Steel Corporation has been looking into the factors that influence how many
millions of tons of steel it is able to sell each year. Management suspects that the following are
major factors the annual national inflation rate, the average price per ton by which imported steel
undercuts Allegheny's prices (in dollars), and the number of cars (in millions) that U.S. automakers
are planning to produce in that year. Data for 7 years have been collected:

Millions of Inflation Imported Number

Year Tons Sold Rate Undercut of Cars
Y X1 X2 X3
1993 4.20 3.10 3.10 6.20
1992 3.10 3.90 5.00 5.10
1991 4.00 7.50 2.20 5.70
1990 4.70 10.70 4.50 7.10
1989 4.30 15.50 4.35 6.50
1988 3.70 13.00 2.60 6.10
1987 3.50 11.00 3.05 5.90
The output from the computer runs as follows:
Regression Statistics
Multiple R 0.9311
R2 0.8670
2
Adjusted R 0.7340
SE 0.2773
Observations 7
Coefficients SE t Stat P-value Lower 95% Upper 95%
Intercept -1.0490 1.1944 -0.8783 0.4444 -4.8500 2.7520
Inflation -0.0282 0.0288 -0.9795 0.3996 -0.1199 0.0635
Imported -0.0508 0.1072 -0.4744 0.6676 -0.3919 0.2902
Car 0.8904 0.2128 4.1849 0.0249 0.2133 1.5675

(a) Using excel output; determine the best fitting regression equation for these data.
Marks 2.5
(b) What percentage of the total variation in the number of millions of tons of steel sold by
Allegheny each year is explained by this equation? Marks 2.5

(c) How many tons of steel should Allegheny expect to sell in a year in which the inflation rate is
7.1, American automakers are planning to produce 6.0 million cars, and the average imported price
undercut per ton is $3.50? Marks 2.5

(d) State and interpret the standard error of estimate for this problem. Marks 2.5

Ans. a) Million of tons sold = -1.049 – 0.028 Inflation rate – 0.051 Imported undercut + 0.890
Number of cars
b) The percentage of the total variation in the number of millions of tons of steel sold by Allegheny
each year is explained by R2 = 0.867 ~ 86.7%

c) Inflation rate = 7.1, Imported undercut = 3.50 and Number of cars = 6.0
Expected sell in a year = -1.049 – 0.028 (7.1) – 0.051 (3.5) + 0.890 (6) = 3.91 million tons

d) Standard error = 0.2773 the standard deviation of the residuals. This measures the dispersion
of the points about the multiple regression planes.

Question 4. Boom in the Indian Cement Industry: ACC’s Role

Introduction

The Indian Cement industry was delicensed in 1991. After China, India is the second largest
producer of cement. The estimated demand for is 265 million metric tonnes by 2114-2115. The
Indian cement industry saw a growth of 11.6% in 2006. The financial year 2007 also witnessed a
muted growth of 7.1%. In order to meet the increasing demand several manufacturers have
embarked on significant capacity expansion plans.

ACC- A Pioneer in the Indian Cement Industry

Associated Cement Companies Ltd(ACC) came into existence in 1936, after the merger of 10
companies belonging to four important business groups: Tatas, Khataus, Killick, Nixon and F E
Dinshaw. A Tata Group was associated with ACC since its to inception. It sold 14.45% of its share
to Gujarat Ambuja Cement Ltd between 1999 and 2000. After this strategic alliance, Gujarat
Ambuja Cements Ltd. became the largest single stake holder in ACC. In 2005, ACC entered into
a strategic relationship with the Holcim group in Switzerland, a world leader in cement as well as
large supplier of concrete, aggregates, and certain construction related services. These global
strategic alliances have strengthened the company.

ACC is India’s foremost manufacturer of cement and concrete. The company has a wide range of
operations with 14 modern cement factories, more than 30 ready mix concrete plants, 20 sales
offices, and several zonal offices. ACC’s research and development facility has a unique track
record of innovative research, product development, and specialized consultancy services. ACC’s
brand name is synonymous with cement and it enjoys a high level of equity in the Indian market.

The Impact of Cartelization

Cartelization is one of the major problems in the cement industry. Cartelization takes place when
dominant players of the industry join together to control prices and limit competition. In the Indian
market, manufacturers have been known to enter into agreements to artificially limit the supply of
the cement so that the price remains high. When markets are not sufficiently regulated, large
companies may be tempted to collude instead of competing with each other. For example, in May
2006, the Competition Council of Romania imposed a combined fine of 27 million Euros on
France’s Lafarge, Switzerland’s Holcim and Germany’s Carpatcement for being involved in the
cement cartel in the Romanian market. These three companies share 98% of Romanian cement
capacity. The government should take appropriate action to check acts of cartelization.

Escalating input and fuel costs have forced manufacturers to tap new sources of supply and
increase the quest for alternative fuels and raw materials. The cement industry is faced with the
challenges of optimizing the utilization of scare basic raw materials and fossil fuels while
simultaneously protecting the environment and maintaining emission levels within acceptable
limits. It is vital for the cement industry to achieve high levels of energy utilization efficiencies
and to sustain them continuously. Table 1 exhibits sales turnover and advertisement expenses of
ACC from 1995 to 2007 .

Table 1. Sales turnover and advertisement expenditure of

ACC from 1995-2007
Sales Advertisement
Year (in million rupees) (rs in million rupees)
1995 20,427.0 58.6
1996 23,294.6 72.6
1997 24,510.5 122.3
1998 23,731.1 61.9
1999 25,858.3 144.7
2000 26,792.2 132.2
2001 29,792.2 132.2
2002 32,260.0 184.3
2003 33,718.8 259.8
2004 39,003.7 334.8
2005 45,498.0 321.9
2006 37,235.1 336
2007 64,680.6 442.3
The relationship summary between sales and advertisement is given in table 2.

Table 2. SUMMARY OUTPUT

Regression Statistics
Multiple R 0.92
H0: R Square
R Square 0.85 =0
Adjusted R
Square 0.84
Standard Error 4778.97
Observations 13 Cal alpha
ANOVA P value
Significance
Df SS MS F F
Regression 1 1473399083.19 1473399083.19 64.51 0.00
Residual 11 251224375.24 22838579.57
Total 12 1724623458.43
Cri alpha =
0.05
P- Lower Upper
Coefficients Standard Error t Stat value 95% 95%
Intercept 15083.93 2576.59 5.85 0.00 9412.88 20754.97
Advertisement 88.61 11.03 8.03 0.00 64.33 112.89

(a) Develop an appropriate regression model to predict sales from advertisement

Ans: predicted sales = 15083.93 + 88.61 advertisement

(b) Explain or interpret the coefficient of determination.

Ans: R Square = 0.85 that implies 85 percent of the variation in sales over the years is explain by
advertisement expenses.

(c) Predict the sales when advertisement is Rs.500 million

Ans: The sales will be 59390.1

(d) Test the significance of the coefficients

Ans: The t value of intercept and advertisement are 5.85 and 8.03 which are more than 1.96.
Similarly p value of intercept and advertisement are 0.0001 and 0.000006 which are less than
assume p value 0.05. This implies these are significant at more than 95 percent confident level.
H0: Coefficient of Ad = 0
(e) Test the significance level of overall model.

However the F value is 64.51 and the corresponding p value 0.000006 which are less than assume
p value 0.05 implies the overall model is significant at more than 95 percent confident level.