HARMON FOODS

Q1&2: Correlation Matrix

• Before running any regression model, we need to verify if there is risk of

multicollinearity between independent variables, that is, if correlation between two
independent variables is higher than |0.7|

  Sales CP CP(t-1) CP(t-2) DA DA(t-1) DA(t-2) SeasIndx

Sales 1
CP 0.4885 1
CP(t-1) -0.33516 -0.0357 1
CP(t-2) 0.093496 -0.19753 -0.02093 1
DA 0.541992 -0.23542 -0.11458 0.331808 1
DA(t-1) 0.002475 -0.19187 -0.23156 -0.11414 -0.04248 1
DA(t-2) 0.036733 0.262974 -0.18828 -0.227 -0.12844 -0.04161 1
SeasInd
x 0.689602 0.325759 -0.11326 -0.04594 0.140495 -0.00673 0.089479 1

• From the correlation matrix below we can confirm that there is no risk of multi-
collinearity between any pair of independent variables
Q1&2: Regression 1 (all variables)

• The first model we

run includes all
independent variables

• Certain independent
variables are not
significant

• Therefore, we start
removing the variable
with highest p-value,
CP(t-2), and run
iterations
 Q1&2: Regression Final

Regression Statistics
Multiple R 0.957
R Square 0.916
• All variables are
Adjusted R significant
Square 0.906
Standard Error 37080
Observations 48 • No risk of
multicollinearity
ANOVA
  df SS MS F Significance F
Regression 5 6.3E+11 1.3E+11 9.2E+01 1.7E-21 • Adjusted R square is
Residual 42 5.8E+10 1.4E+09
Total 47 6.9E+11      
high (>0.9)

Standard Upper
  Coefficients Error t Stat P-value Lower 95% 95%

Intercept (35,889) 40,143 (1) 0.38 (116,901) 45,122

SeasIndx 3,635.637 410 9 0.00 2,809 4,463

CP 0.432 0 10 0.00 0 1

DA 0.074 0 12 0.00 0 0

CP(t-1) -0.193 0 (5) 0.00 (0) (0)

DA(t-2) -0.014 0 (2) 0.03 (0) (0)

Q1&2: Analysis of Residuals

SeasIndx Residual Plot CP Residual Plot

150000.0 150000.0

100000.0 100000.0

50000.0
Residuals

50000.0

Residuals
0.0
60 70 80 90 100 110 120 130 0.0
-50000.0 0 100000 200000 300000 400000 500000 600000
-50000.0
-100000.0
-100000.0
-150000.0
SeasIndx -150000.0
CP

CP(t-1) Residual Plot

150000.0

100000.0
• Residuals are homoscedastic
50000.0
Residuals

0.0
• Residuals are not autocorrelated
0 100000 200000 300000 400000 500000 600000
-50000.0
• Residuals are not autocorrelated
-100000.0

-150000.0
• Residuals are normally distributed
CP(t-1)
Q1&2: Analysis of Residuals

DA(t-2) Residual Plot

150000.0

100000.0

50000.0
Residuals

0.0
0 1000000 2000000 3000000 4000000 5000000 6000000

-50000.0

-100000.0

-150000.0

DA(t-2)

DA Residual Plot
150000.0

100000.0 • Residuals are homoscedastic

50000.0
Residuals

• Residuals are not autocorrelated

0.0
0 1000000 2000000 3000000 4000000 5000000 6000000
-50000.0
• Residuals are not autocorrelated
-100000.0

-150000.0 • Residuals are normally distributed

DA
Output model (visualized)

Actual Sales vs Predicted Sales

800000

700000
R² = 0.92

600000

500000

400000

300000

200000

100000

0
100000.0 200000.0 300000.0 400000.0 500000.0 600000.0 700000.0 800000.0
 Q3: January 1988 forecast

January 1988 Sales Forecast (cases)

Inputs: Regression Model: Point

  Estimate:
• CP: 100,000

𝑠𝑎𝑙𝑒𝑠=−35,8 9.479+0.4325𝐶𝑃−0.1931𝐶𝑃(𝑡−1)+0. 739𝐷𝐴−0. 136𝐷𝐴(𝑡−2)+3,6 5.637𝑆𝑒𝑎𝑠𝐼𝑛𝑑𝑥

• DA: 500,000   = 436,132 cases
• CP (t-1): 71,881
• DA (t-2): 376,556
• SeasIndx: 113

Sales forecast Prediction Interval (95% confidence Interval)

Inputs: Prediction Interval 95% Prediction Interval

• Zα/2 =1.96
• Std Dev Reg: 37,080.343 𝑠^ − 𝐸 ≤ 𝑆 ≤ 𝑆
^ +𝐸 S = [363,454.55 ; 508,809.49]
 
𝐸=Zα /2∗ 𝑆𝑡𝑑 𝐷𝑒𝑣 𝑅𝑒𝑔
 
Q4: Regression Coefficients

Regression Model:

𝑠𝑎𝑙𝑒𝑠=− 35,889.479+0.4325 𝐶𝑃 − 0.1931𝐶𝑃 ( 𝑡 −1 ) +0.0739 𝐷𝐴 −0.0136 𝐷𝐴 ( 𝑡 − 2 ) +3,635.637 𝑆𝑒𝑎𝑠𝐼𝑛𝑑 x

 
bi Interpretation 80% CI

All else being equal, for each additional extra case of

CP Consumer Pack, sales increase on average by 0.4325 [0.3759;0.4890]
cases
All else being equal, for each additional extra case of
CP (t-1) Consumer Pack the previous month, sales decrease on [-0.2442;-0.1420]
average by 0.1931cases

All else being equal, for each additional dollar on Dealer

DA [0.0658;0.0820]
Allowance, sales increase on average by 0.0739 cases

All else being equal, for each additional dollar on Dealer

DA (t-2) Allowance the previous month, sales decrease on average [-0.0217;-0.0056]
by 0.0136 cases

All else being equal, for a unit increase in the Seasonality

SeasIndx [3,109.01;4,162.27]
Index, sales increase on average by 3,635.64 cases
Q5: Extra budget
As described in the
previous slide, all else
being equal:
Given the regression • for each additional extra
model, if some extra case of Consumer Pack,
Budget became sales increase on average
by 0.4325 cases
available, we would • for each additional dollar
allocate it to on Dealer Allowance, sales
Consumer packs increase on average by
0.0739 cases
We also need to
consider the negative
effect on sales that
We also know from the Consumer Packs the
case that each following period and
Consumer Pack has a Dealer Allowances in
cost of 20 cents for the two periods from
company, present.
and therefore, Nevertheless, the net
investing $1 has an positive impact on
increase in sales on sales of an additional
average of dollar spend in
5 * 0.4325 = 2.1625, Consumer Packs is
larger than a dollar
which yields a much spend in Dealer
higher return than Allowances (1.197 vs.
investing an additional 0.0603)
$1 in Dealer
Allowances (2.1625 vs.
0.0739)
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