Question 1

A company uses regression analysis to forecast sales based on advertising spend. The resulting equation is: Sales = $500,000 + (4.5 * Advertising Spend). The R-squared value is 0.85.

Management is considering increasing advertising spend by $100,000. Based on this model, what is the expected increase in Sales, and how reliable is this prediction?

Accepted Answer

1. Identify the slope (coefficient of X), which is 4.5. This means for every $1 ad spend, sales rise $4.5.
2. Multiply slope by the change in X ($100,000).
3. Interpret R-squared: 0 to 1 scale. 0.85 is strong.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Adding the intercept to the change; misinterpreting R-squared.

How to approach this question

Full Answer

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