Reilly Global Communications (RGC), Inc., sells communications systems to companies that have worldwide operations. Over the next year, RGC will be instituting important improvements in its manufacturing operations. The CEO and majority stockholder, Terry Reilly, has been extremely optimistic about the outlook for the firm and made the state ment that sales will certainly exceed $6 million in the first half of 1996.
Semiannual data for RGC over the past 19 years are presented in Table 10.8. The Spending Index is related to the amount of disposable income that consumers have, ad- justed for inflation and averaged over the industrial nations. System Price is the average sales price of systems that RGC sells, Capital Investment refers to capital investment in the business, and Advertising and Marketing and Sales are self-explanatory.
a. Use the data in Table 10.8 to run a regression analysis with Sales as the response vari- able and the other four variables as explanatory variables. Write out the expression for Expected Sales, conditional on the other variables. Interpret the coefficients.
b. The forecast for the Spending Index in the first half of 1996 is 45.2. The company has committed $145,000 for capital improvements during this time. In order to make his goal of $6 million in sales, Reilly has indicated that the company will offer discounts on systems (to the extent that the average system price could be as low as $70,000) and will spend up to $90,000 on advertising and various marketing programs. If the firm drops the price as much as possible and spends the full $90,000 on Advertising and Marketing, what is the expected value for Sales over the next six months? Estimate the probability that Sales will exceed $6 million.
c. Given that the company spends the full $90,000 on Advertising and Marketing, how low would Price have to be in order to ensure a 90% chance that Sales will exceed $6 million? What advice would you give Terry?