Factor analysis attempts to identify underlying variables, or factors, that explain the pattern of correlations within a set of observed

variables. Factor analysis is often used in data reduction to identify a small number of factors that explain most of the variance observed in a much larger number of manifest variables. Factor analysis can also be used to generate hypotheses regarding causal mechanisms or to screen variables for subsequent analysis (for example, to identify collinearity prior to performing a linear regression analysis). The factor analysis procedure offers a high degree of flexibility:

Seven methods of factor extraction are available. Five methods of rotation are available, including direct oblimin and promax for nonorthogonal rotations. Three methods of computing factor scores are available, and scores can be saved as variables for further analysis.

Problem An industry analyst would like to predict automobile sales from a set of predictors. However, many of the predictors are correlated, and the analyst fears that this might adversely affect her results.
This information is contained in the file car_sales.sav . Use Factor Analysis with principal components extraction to focus the analysis on a manageable subset of the predictors. The variables are price in thousands,vehicle type, engine size, horse power, wheel base etc.. An spss output of factor analysis.

KMO SCORE .0.789

Interpretation of the above table

KMO SCORE 0.789 SAYS THAT THE DATA IS CPMPATIBLE FOR FACTOR ANALYSIS. KMO less than 0.5 implies data is not good for factor analysis.
The first component is most highly correlated with Price in thousands and Horsepower. The second component is most highly correlated with Length The third component is most highly correlated with Vehicle type. So, the ten variables have been reduced to theree main factors. Apart from this also read the statistics associated with Factor analysis for MCQS AND SHORT ANSWER QUESTIONS