Solved: Jim Manzano is the general partner of an

investment group

Jim Manzano is the general partner of an investment group that owns a number of commercial
and industrial properties, including a chain of 15 convenience stores located in the greater
metropolitan area of Cleveland, Ohio. Jim is concerned about the recent increase in inventory
theft and waste (he calls it "spoilage") in his stores. Spoilage has increased by more than 20
percent in each of the past two years. In some stores, the main reason is theft; in others, it is
damage and vandalism; and in still others, merchandise actually does spoil and must be thrown
out. Jim has collected data on spoilage at each of his stores in the recent month and is looking
for patterns of spoilage relative to store size (measured by square feet of floor space, number of
employees, and total sales) and to the location of the store (location 1 is an area where few
arrests for theft, disorderly conduct, or vandalism are made, and location 3 is for areas with high
arrests). Jim is not sure, but he suspects, based on his experience managing convenience
stores, that a relationship exists among these factors. A colleague told him that a type of
regression called "cross-sectional" regression would suit his needs. The cross-sectional
regression takes data from a single time period and determines predictions for the dependent
variable at different cost objects (in this case different stores). The objective of the cross-
sectional regression is to compare the actual known value for the dependent variable to the
predicted value as a basis for assessing the reasonableness of the actual value. This approach
is often used in cases similar to Jim's in which the accuracy or reasonableness of the reported
dependent variable is a concern. In effect, the cross-sectional regression develops a model that
represents the overall patterns in all the data and the unusual stores will be identified by the
largest error terms in the regression. The following data are for the most recent month's
operations:

Required
1. Using Excel or an equivalent software program, prepare a regression analysis that predicts
inventory spoilage at each of the 15 stores. Use any of the four potential independent variables
(or a combination) you think appropriate and explain your answer. Also evaluate the precision
and reliability of the regression you select.
2. Using the regression equation you developed in requirement 1, determine which of the 15
stores might have inventory spoilage that is out of line relative to the entire chain of stores.
Explain yourchoice.

ANSWER
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