Problems: 5. Refer to Table 6-2. For each of the three forecast methods used, ca

Question

Problems:

5. Refer to Table 6-2. For each of the three forecast methods used, calculate the mean absolute deviation (MAD). )Please remember that for the exponential smoothing model, the absolute deviation should NOT be calculated for period 1). Which forecasting model is best (other things constant), based on your calculations?

6. Refer to Table 6-1. Determine the regression line formula for this set of numbers, where time is the X value, and Y is the sales value.

7. Of its monthly sales, the Kingsman company historically has had 25% cash sales with the remainder paid within one month. Each months purchase are equal to 75% of the next months sales forecast; suppliers are paid one month after the purchase. Salary expenses are $50,000 a month, except in January when bonuses equal to 1 percent of the previous years sales are paid out. Interest (on a bond issue) of $10,000 is due in March. Overhead and utilities are expected to be $25,000 monthly. Dividends of $45,000 are to be paid in March. Kingsmans 1999 sales totaled $2 million; December sales were $200,000. Kingsmans estimated sales for January are $100,000; February, $200,000; March, $250,000; and April, $300,000. Assume that the ending December cash balance was $50,000, and that the company desires to keep a minimum cash balance of $40,000. For the Kingsman Company, determine in tabular form the cash budget for January, February, March, and April.

Directions:  Please answer the following questions on a separate piece of paper.  Where appropriate, use the data in the following tables to answer the questions which reference them.  SHOW ALL WORK!!! Table 6-1:  Actual Sales Data Time
Period Actual
Sales 1 345 2 378 3 425 4 450 5 470 6 500 7 532 8 548 9 590 10 625 11 650 Table 6-2 Time
Period Actual
Sales 3-Month
Moving
Average Absolute
Deviation Weighted
Moving
Average
W=.1,.3,.6 Absolute
Deviation Exponential
Smoothing Absolute
Deviation 1 230 F(t)=350 2 238 326 3 260 308 4 275 243 250 299 5 300 258 267 294 6 285 278 289 295 7 270 287 278 293 8 290 285 284 289 9 305 282 297 289 10 320 288 313 292 11 335 305 328 298 12 320 305

Explanation / Answer

Answer of question 5

After calculating Absolute deviation of each forecast model, we have calculated the mean absolute deviation (MAD)

Where Absolute deviation is the deviation from the mean value in absolute term (ignore the negative sign)

And mean absolute deviation (MAD) is the mean or average of Absolute deviation values of each forecast method. As the MAD is lowest for exponential smoothing model therefore exponential smoothing model is the best.

Table 6-2 Time Actual 3-Month Absolute Weighted Absolute Exponential Absolute Period Sales Moving Deviation Moving Deviation Smoothing Deviation Average Average I mean - 3 months moving avg I W=.1,.3,.6 I mean - weighted moving avg I I mean - exponential smoothing I 1 230 F(t)=350 2 238 326 27 3 260 308 9 4 275 243 40 250 38 299 0 5 300 258 25 267 21 294 5 6 285 278 5 289 1 295 4 7 270 287 4 289 1 293 6 8 290 285 2 278 10 289 10 9 305 282 1 284 4 289 10 10 320 288 5 297 9 292 7 11 335 305 22 313 25 298 1 12 320 37 328 40 305 6 Mean 283 288 299 Mean absolute deviation (MAD) 16 17 8

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