CASE STUDY Franchise

Question a:
Using any computer software, perform linear regression analysis from the data in the
table. Estimate parameter X1, X2, X3, X4 and X5.
Answer:
Coefficients of X1 to X5 are below:
Variable
X1
X2
X3
X4
X5

Coefficient
16.20157256
0.174635182
11.52626787
13.58031268
-5.310971819

Question b:
From the result of the regression analysis, derive the equation for annual net sales of
Secret Deli.
Answer:
Annual net sales for Secret Deli, Y.
Y = -18.859 + 16.202X1 + 0.175X2 + 11.526X3 + 13.58X4 5.311X5

Question c:
Test whether the coefficients of each independent variable are statistically
significant.
Answer:
i) F-test. The F value is 611.590 (3 decimal points). So we reject the null
hypothesis and conclude that the independence variables are useful in
explaining annual net sales of Secret Deli with (1-0.00) = 100% confidence.
ii) T-test. The t-value for all variables X1, X2, X3, X4 and X5 are greater than 2
in absolute value. Hence, we can conclude that all the variables are
statistically significance in explaining the net sales of Secret Deli.
iii) P-value. The P-value for the estimated coefficient of all the variables are
almost equal to zero. This is statistically significant at approximately 1 or
100%. Thus the estimated coefficients are highly significant.

Question d:
Calculate the percentage of the variation of output that is explained by the
regression equation.
Answer:
R2

=
=
=

Sum of squared error

Total sum of squared error
952538.941
959080.3519
0.9932

This means the estimated demand equation (the regression line) explains 99% of the
total variation in net sales of Secret Deli across the sample of the 27 franchise stores.
3

Question e:
Explain the purpose of Adjusted R Square from the Table.
Answer:
R2 shows how well data points fit a curve or line. Adjusted R 2 also indicates how
well the data fit a curve or line, but adjusts for the number of data in a model. If less
important data variables were added to a model, adjusted r-squared will decrease. If
more useful data variables were added, adjusted r-squared will increase. Adjusted R2
will always be less than or equal to R 2. In above example, the adjusted R square
value is 0.992, or 99.2% of the variances, which means that the independent
variables of X1 to X5 are actually highly affecting the dependent variable, Y.

Question f:
Using the estimated sales function, briefly explain the economic interpretation of
each value.
Answer:
From the table, the marginal product, MP, of the independent variables in absolute
terms are given as
MPX1 = 16.20157256
MPX2 = 0.174635182
MPX3 = 11.52626787
MPX4 = 13.58031268
MPX5 = 5.310971819
The data above suggests that number of square feet is the most important in
determining the total annual net sales of Secret Deli.
Economic interpretation of each value is explained below:
Value
Interpretation
Intercept = -18.85940731 Value of dependent variable (Y) when all independent
variables (Xs) are equal to zero. This means without
any independent variables, the Secret Deli is estimated
to face loss of (18.859 x RM1000) = RM 18,859 in
total annual sales.
X1 = 16.20157256
For an increase of 1000 square feet for the shop,
expected annual net sales will increase by (16.202 x
RM1000) = RM16,202.
X2 = 0.174635182
For an additional of RM 1000 spent on inventory, it
will increase annual net sales by (0.175 x 1000) = RM
4

X3 = 11.52626787

X4 = 13.58031268

X5 = -5.310971819

175
Additional expenditure of RM 1000 on advertising is
expected to increase sales by (11.526 x RM1000) =
RM11,526.
For every 1000 family increase in size of sales district,
it is estimated to increase in annual net sales by (13.58
x RM1000) = RM13,580.
For every increase in number of competing stores in
district, it will contribute to decline in annual net sales
by (5.311 x RM1000) = RM5311.

Question g:
Based on the estimated sales function, compute the average sales of Secret Deli.
Answer:
Variable
Average

Y
286.57

X1
3.33

X2
387.48

X3
8.10

X4
9.69

X5
7.74

Average sales, Y.
Y = -18.859 + 16.202X1 + 0.175X2 + 11.526X3 + 13.58X4 5.311X5
Y = -18.859 + 16.202(3.33) + 0.175(387.48) + 11.526(8.10) + 13.58(9.69)
5.311(7.74)
= 286.57
Average sales of Secret Deli is RM 286.57, based on the estimated sales function.

Question h:
What is the average sales if amount spent on advertising increase by 10 percent?
Answer:
If advertising increase by 10%,
Average of X3 = 8.10 + (8.10 x 10%)
= 8.91
Average sales, Y = -18.859 + 16.202X1 + 0.175X2 + 11.526X3 + 13.58X4
5.311X5
= -18.859 + 16.202(3.33) + 0.175(387.48) + 11.526(8.91) +
13.58(9.69) 5.311(7.74)
= 296.08
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Average sales will be RM 296.08, if amount spent on advertising increase by 10%.

Question i:
What is the average sales if number of competing stores in district increase by 10
percent?
Answer:
If number of competing stores increase by 10%,
Average of X5 = 7.74 + (7.74 x 10%)
= 8.514
Average sales, Y = -18.859 + 16.202X1 + 0.175X2 + 11.526X3 + 13.58X4
5.311X5
= -18.859 + 16.202(3.33) + 0.175(387.48) + 11.526(8.10) +
13.58(9.69) 5.311(8.514)
= 282.66
Average sales will be RM282.66 if number of competing stores increase by 10%.