Problem 2: Forecasting (10 points) Given these sales figures over the last 7 wee

ID: 355919 • Letter: P

Question

Problem 2: Forecasting (10 points)

Given these sales figures over the last 7 weeks, your boss needs you to test two different forecasting methods (parts a and b below) to determine which method is best. For your measure of “best”, recommend to your boss that the company should use the method with the lowest mean absolute deviation (MAD). Then use that method to provide your forecast for week 8 in part c.

Week Unit Sold

1 10,540

2 12,650

3 10,920

4 11,810

5 13,450

6 14,550

7 13,970

Calculate the MAD for the 4 period moving average forecasting technique (4 points).

Calculate the MAD for the 2 period weighted moving average forecasting technique. Use weights of 0.6 and 0.4, with the most recent observation weighted higher (4 points).

How many units would you forecast will be sold in week 8? (2 points)

Explanation / Answer

Please find below table containing Forecast values and values of absolute deviation.

Following may be noted :

Forecast ( 4 period moving average ) :

Ft = ( At-1 + At-2 + At-3 + At-4) /4

Forecast ( 2 period moving average ) :

Ft = 0.6 xAt-1 + 0.4 x At-2

Ft = Forecast for period t

At-1 . At-2. At-3. At-4 = Actual units sold during period t-1, t-2 , t-3 and t-4 respectively

WEEK

Unit sold

Forecast ( 4 period moving average)

Absolute deviation ( 4 period moving average)

Forecast ( 2 period weighted moving average)

Absolute deviation ( 2 period weighted moving average)

10540

12650

10920

11806

886

11810

11612

198

13450

11480

1970

11454

1996

14550

12207.5

2342.5

12794

1756

13970

12682.5

1287.5

14110

140

13445

14202

SUM =

5600

4976

Accordingly,

Sum of Absolute deviations basis 4 period moving average = 5600

Mean Absolute Deviation ( MAD ) basis 4 period moving average =5600 / 3 = 1866.66

Sum of absolute deviations basis 2 period weighted moving average = 4976

Mean Absolute Deviation ( MAD) basis 2 period weighted moving average = 4976/ 3 = 1658.66

FORECASTED UNITS TO BE SOLD DURING WEEK 8 :

Basis 4 period moving average = 13445

Basis 2 period weighted moving average = 14202