Question

Problem 2: Forecasting (10 points) Given these sales figures over the last 6 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 7 in part c. Week >WN Unit Sold 523 587 622 601 615 578 a) Create a 3 period moving average forecast for weeks 4-7 and then calculate the MAD. (4 points). b) Create a 2 period weighted moving average forecast for weeks 3-7 and then calculate the MAD. Use weights of 0.6 and 0.4, with the most recent observation weighted higher (4 points) c) How many units would you forecast will be sold in week 72 (2 points)

Answer 1

(a) Let the number of actual units sold for week t be denoted by At and Forecast by Ft

for 3 period moving average forecast, Ft = (At-1 + At-2 + At-3) / 3

Calculating using the above formula -

Period	at	Ft	Error	Absolute Error
1	523
2	587
3	622
4	601	577.33	23.67	23.67
5	615	603.33	11.67	11.67
6	578	612.67	-34.67	34.67
7		598.00
				23.33
				MAD

MAD = 23.33

(b) for 2 period weighted moving average, Ft = 0.6At-1 + 0.4At-2

Calculating using the above -

Period	at	Ft	Error	Absolute Error
1	523
2	587
3	622	548.60	73.40	73.40
4	601	601.00	0.00	0.00
5	615	613.60	1.40	1.40
6	578	606.60	-28.60	28.60
7		600.20
				25.85
				MAD

MAD = 10.00

(c) Since 3 period moving average forecast has lower MAD, it is a better forecast

Hence, forecast for Week 7 = 598 units