A manager has used an existing method to forecast the demand for gallons of ice
ID: 391327 • Letter: A
Question
A manager has used an existing method to forecast the demand for gallons of ice cream for the past six periods. Demand and forecast amounts using this method are shown in the table below. The manager is now contemplating the use of the Simple Moving Average (SMA) method of size 2 for demand forecasting. Would the SMA method of size 2 produce better results? For full credit show all steps and calculations.
Period
Demand
Forecast
1
90
87
2
85
88
3
91
87
4
92
89
5
95
90
6
88
92
Period
Demand
Forecast
1
90
87
2
85
88
3
91
87
4
92
89
5
95
90
6
88
92
Explanation / Answer
Simple moving average of period size 2 will give forecast for period 3 as
F3 = Demand for period1 + demand for period 2 /2 = 90+85/2 = 87.5
Similarly
F4 = 85+91/2 = 88
F5 = 91+92 /2 = 91.5
F6 = 92+95 /2 = 93.5
Absolute deviation = absolute value of difference between the demand and forecast for that period
Mean absolute deviation (MAD) for previous scenario ( from period 3 to 6) = 4+3+5+4 /4 = 4
MAD in the new scenario ( moving average ) = (91-87.5)+(92-88)+( 95-91.5)+(88-93.5) /4
= 3.5+4+3.5+5.5 /4 =4.125
The MAD is marginally higher in case II, hence the previosu method was more accurate.
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