ExpertMedium1 markMultiple Choice
CPA · Question 08 · Area 1: Business Analysis
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. <br/><br/>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?
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. <br/><br/>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?
Answer options:
A.
Increase of $950,000; Low reliability.
B.
Increase of $450,000; Low reliability.
C.
Increase of $450,000; High reliability.
D.
Increase of $500,000; High reliability.
How to approach this question
1. Identify the slope (coefficient of X), which is 4.5. This means for every $1 ad spend, sales rise $4.5.<br/>2. Multiply slope by the change in X ($100,000).<br/>3. Interpret R-squared: 0 to 1 scale. 0.85 is strong.
Full Answer
C.Increase of $450,000; High reliability.✓ Correct
C
The coefficient 4.5 represents the variable relationship. Increase = 4.5 * $100,000 = $450,000. R-squared measures goodness of fit; 0.85 is generally considered a strong correlation in business contexts.
Common mistakes
Adding the intercept to the change; misinterpreting R-squared.
Practice the full CPA BAR Practice Exam
50 questions · hints · full answers · grading
More questions from this exam
Q01TechGlobal Inc. is evaluating the performance of its European division using Economic Value Added...HardQ02A manufacturing company is analyzing its production process to identify bottlenecks. The process ...MediumQ03Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identi...MediumQ04RetailCo is evaluating two strategic initiatives using a Balanced Scorecard approach. <br/>Initia...MediumQ05A company is deciding between two mutually exclusive projects. <br/>Project X: NPV = $50,000, IRR...Medium