EXAMPLE PROBLEM WITH SOLUTIONS

A. Moving Averages

The orders for an item are observed for six months (January to June) and recorded
below:

Month Orders
January 150
February 200
March 310
April 300
May 400
June 200

Calculate the 3-month moving average and identify the forecast for the month of July.

Solutions:
Formula for moving average:

Month Orders 3-month moving average

January 150
February 200
March 310
April 300 (150+200+310)/3 = 220
May 400 (200+310+300)/3 = 270
June 200 (310+300+400)/3 = 336.67
July (300+400+200)/3 = 300
 3-month moving aver ages
Actual 3-month
450
400
350
300
250
ORDERS

200
150
100
50
0
January February March April May June July
months

B. Centered moving average

Find the center moving averages.

Year Quarter Sales

2018 1 100
2 120
3 240
4 250
2019 1 240
2 200
3 270
4 330
2020 1 340
2 410
3 380
4 400
 Solutions:

Year Quarter Sales Moving Centered

Average Moving Average
2018 1 100
2 120 177.5
3 240 212.5 195
4 250 232.5 222.5
2019 1 240 240 236.5
2 200 260 250
3 270 285 272.5
4 330 337.5 311.25
2020 1 340 365 351.25
2 410 382.5 373.75
3 380 396.67 389.58
4 400 390 393.33

C. Weighted Moving Average

Month Orders
January 150
February 200
March 310
April 300
May 400
June 200

Pritchett Co. wants to compute a 3-month weighted moving average with a weight of
20% for February orders, 30% for April orders, and 50% for May orders.

Solution:

WMA 3= (20%)(200) + (30%)(300) + (50%)(400)

= 40 + 90 + 200
= 330
D. Exponential Smoothing

Bright Co.’s demand data for the last 12 months are listed below:

Period Month Demand

1 January 47
2 February 50
3 March 51
4 April 47
5 May 55
6 June 60
7 July 53
8 August 57
9 September 66
10 October 62
11 November 65
12 December 64

a. Use exponential smoothing with a smoothing parameter α = 0.3 to compute

demand forecast for January next year (period 13).
b. Use exponential smoothing with a smoothing parameter α = 0.5 to compute
demand forecast for January next year (period 13).
 Solutions:

Perio Month Deman Forecast

d d α = 0.3 α = 0.5
1 January 147
2 February 150 (.30)(147)+(.70)(147)=147 (.50)(147)+(.50)(147)=147
3 March 151 (.30)(150)+(.70)(147)=147.9 (.50)(150)+(.50)(147)=148.5
4 April 247 (.30)(151)+(.70)(147.9)=148.83 (.50)(151)+(.50)(147.9)=149.75
5 May 155 (.30)(247)+(.70) (.50)(247)+(.50)
(148.83)=178.28 (148.83)=198.38
6 June 260 (.30)(155)+(.70)(178.28)=171.3 (.50)(155)+(.50)
(178.28)=176.69
7 July 153 (.30)(260)+(.70)(171.3)=197.91 (.50)(260)+(.50)(171.3)=218.34
8 August 157 (.30)(153)+(.70) (.50)(153)+(.50)
(197.91)=184.44 (197.91)=185.67
9 Septembe 266 (.30)(157)+(.70)(184.44)=176.2 (.50)(157)+(.50)
r (184.44)=171.34
10 October 162 (.30)(266)+(.70)(176.2)=203.14 (.50)(266)+(.50)(176.2)=218.67
11 November 165 (.30)(162)+(.70)(203.14)=190.8 (.50)(162)+(.50)
(203.14)=190.33
12 December 264 (.30)(165)+(.70)(190.8)=183.06 (.50)(165)+(.50)(190.8)=177.64
13 January (.30)(264)+(.70) (.50)(264)+(.50)
(183.06)=207.34 (183.06)=220.83
 Exponenti al sm ooti ng f or ecasts
Demand α = 0.3 α = 0.5
300

250

200

150
DEMAND

100

50

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mONTH

E. Trend Projection
The amount of pastries sold by Bella’s Bakery for the last nine months are listed
below:

Month Sales
January 153
February 187
March 142
April 147
May 196
June 209
July 199
August 212
September 208

Forecast the amount of pastries that will be sold by Bella’s Bakery for the month
of October.

Solutions:
T t = b0 + b1t
 n Σt Y t −ΣtΣ Y t
b 1= 2 2
n Σ t −( Σt )
b 0=Ȳ −b1 t

Month (t) Sales (Y t ) (t)(Y t ) t2

January (1) 153 153 1
February (2) 187 347 4
March (3) 142 426 9
April (4) 147 588 16
May (5) 196 980 25
June (6) 209 1254 36
July (7) 199 1393 49
August (8) 212 1696 64
September (9) 208 1872 81
Σt=45;N=9 ΣY t =1653 Σ(t)(Y t )=8736 Σt 2=285

Ȳ = 1653 / 9 = 183.67
t = 45 / 9 = 5

9(8736)−( 45)(1653)
b 1=
9(285)−(45)2
78,624−74,385
b 1=
2,565−2025
4,239
b 1=
540
b 1= 7.85
b 0=183.67−(7.85)(5)
b 0=¿ 144.42

To find the forecast for the 10th month (October):

T 10 = 144.42 + (7.85)(10)
T 10 = 144.24 + 78.5
 T 10 = 222.74

F. Trend Projection Adjusted for Seasonal Influence

Ira’s Ice Cream Shop wants to know the quarterly forecast of the numbers
of expected customer for next year. Forecast the customer demand for
each quarter for the third year if the total demand for the said year is
estimated to 1,800. The quarterly demand data for the past two years can
be seen below.
Quarter Demand
Year 1 Year 2
1 140 120
2 455 500
3 405 475
4 200 305
Total 1,200 1,400

Solutions:
Calculate the average demand per season for each year by dividing the
annual demand by the number of seasons per year.
Year 1: 1,200 / 4 = 300
Year 2: 1,400 / 4 = 350

Divide the actual demand for season by the average demand per season to
find the seasonal index for each season of each year.
Quarter Demand
Year 1 Seasonal Year 2 Seasonal
index index
1 140 140/300=0.47 120 120/350=0.34
 2 475 475/300=1.58 520 520/350=1.49
3 385 385/300=1.28 465 465/350=1.33
4 200 200/300=0.67 295 295/350=0.84
Total 1,200 1,400

Find the average seasonal index for each season:

Quarter 1: (0.47+0.34)/2 = 0.405
Quarter 2: (1.58+1.49)/2 = 1.535
Quarter 3: (1.28+1.33)/2 = 1.305
Quarter 4: (0.67+0.84)/2 = 0.755

To calculate the forecast for each season of next year:

Find the average demand for the third year:
Average demand: 1,600/4 = 400

Multiply the average seasonal index by the average demand of the third year to find the
seasonal forecast for the next year:
Quarter 1: 0.405 (400) = 162
Quarter 2: 1.535 (400) = 614
Quarter 3: 1.305 (400) = 522
Quarter 4: 0.755 (400) = 302

E. Mean Squared Error

The actual sales and forecast data from two different coffee shops for 12 months are
presented below.
COFFEE SHOP A
Month Actual Sales Forecast
1 100 105
 2 115 105
3 200 200
4 215 220
5 240 225
6 220 225
7 230 230
8 300 305
9 305 310
10 295 320
11 295 320
12 300 320

COFFEE SHOP B
Month Actual Sales Forecast
1 105 110
2 120 115
3 200 200
4 205 210
5 225 225
6 235 240
7 250 260
8 305 305
9 295 310
10 290 300
11 305 300
12 315 320

Find which coffee shop has the better model using mean square error.
Solutions:
MSE=
∑ ( actual - forecast )2
n
COFFEE SHOP A
Month Actual Forecast Actual - Forecast ¿
Sales
1 100 105 -5 25
2 115 105 10 100
3 200 200 0 0
4 215 220 -5 25
5 240 220 15 225
6 220 225 -5 25
7 230 230 -0 0
8 300 305 -5 25
9 305 310 -5 25
10 295 300 -25 25
11 295 320 -25 625
12 300 320 -20 400
Σ=1500

MSE = 1500 / 12 = 125

COFFEE SHOP B
Month Actual Forecast Actual - Forecast ¿
Sales
1 105 110 -5 25
2 120 115 5 25
3 200 200 0 0
4 205 210 -5 25
5 225 225 0 0
6 235 240 -5 25
7 250 260 -10 100
8 305 305 0 0
9 295 310 -15 225
10 290 300 -10 100
11 305 300 5 25
12 315 320 -5 25
Σ = 575

MSE = 575 / 12 = 47.92

 G. Mean Squared Deviation
The actual sales and forecast data from two different coffee shops for 12 months
are presented below.
COFFEE SHOP A
Month Actual Sales Forecast
1 100 105
2 115 105
3 200 200
4 215 220
5 240 225
6 220 225
7 230 230
8 300 305
9 305 310
10 295 320
11 295 320
12 300 320

COFFEE SHOP B
Month Actual Sales Forecast
1 105 110
2 120 115
3 200 200
4 205 210
5 225 225
6 235 240
7 250 260
8 305 305
9 295 310
10 290 300
11 305 300
12 315 320

Find which coffee shop has the better model using mean absolute deviation

Solutions:
MAD=
∑ |actual−forecast|
n

COFFEE SHOP A
Month Actual Forecast Actual - Forecast |Actual - Forecast|
Sales
1 100 105 -5 5
2 115 105 10 10
3 200 200 0 0
4 215 220 -5 5
5 240 220 15 15
6 220 225 -5 5
7 230 230 0 0
8 300 305 -5 5
9 305 310 -5 5
10 295 300 -25 25
11 295 320 -25 25
12 300 320 -20 20
Σ=100

MAD = 100 / 12 = 8.33

COFFEE SHOP B
Month Actual Forecast Actual - Forecast |Actual - Forecast|
Sales
1 105 110 -5 5
2 120 115 5 5
3 200 200 0 0
4 205 210 -5 5
5 225 225 0 0
6 235 240 -5 5
7 250 260 -10 10
8 305 305 0 0
9 295 310 -15 15
10 290 300 -10 10
11 305 300 5 5
12 315 320 -5 5
Σ = 65

MAD = 65 / 12 = 5.42
 H. Mean Absolute Percentage Error

The actual number of orders and forecasted data from a candy shop for twelve
months is listed below.

Month Actual Orders Forecast

1 33 32
2 35 35
3 40 42
4 47 45
5 45 45
6 49 47
7 42 48
8 35 38
9 35 35
10 39 39
11 40 43
12 42 45

Solutions:

Month Actual Orders Forecast |actual-forecast| |actual-

forecast| / actua|
* 100
1 33 32 1 3.03
2 35 35 0 0
3 40 42 2 5
4 47 45 2 4.26
5 45 45 0 0
6 49 47 2 4.08
 7 42 48 6 14.29
8 35 38 3 8.57
9 35 35 0 0
10 39 39 0 0
11 40 43 3 7.5
12 42 45 3 7.14
Σ = 53.87

MAPE = 53.87 / 12 = 4.49%

I. Control Chart

Construct a control chart based on the data collected from Bianca’s beaded
bracelets business.

Month Number of bracelets sold

1 21
2 25
3 31
4 19
5 24
6 22
7 29
8 34
9 30
10 25
 11 42
12 40
Σ = 342

Solutions:
First calculate the control limits:
Find the standard deviation by subtracting the mean from the numbers of bracelets sold
each month. After that, find the square of the difference.
Mean = 342 / 12 = 28.5
Mont Number of bracelets sold - Mean ¿
h
1 21 - 28.5 = -7.5 56.25
2 25 - 28.5 = -3.5 12.25
3 31 - 28.5 = 2.5 6.25
4 19 - 28.5 = -9.5 90.25
5 24 - 28.5 = -4.5 20.25
6 22 - 28.5 = -6.5 42.25
7 29 - 28.5 = 0.5 0.25
8 34 - 28.5 = 5.5 30.25
9 30 - 28.5 = 1.5 2.25
10 25 - 28.5 = -3.5 12.25
11 42 - 28.5 = 13.5 182.25
12 40 - 28.5 = 11.5 132.25
Σ = 587

We can now find the standard deviation:

√ 587 =
12
√ 48.91666667

= 6.99

Identify the control limits by determining how many standard deviations you want to fall
within your controlled process. We are going to use +3 and -3 for this problem.
Upper control limit: 28.5 + 6.99 + 6.99 + 6.99 = 49.7
Lower control limit: 28.5 - 6.99 - 6.99 - 6.99 = 7.53
We can now construct the control chart:

Control Chart
60
Number of bracelets sold

50
40
30
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12
Months

Number of bracelets sold Average/Mean

Upper Control Limit Lower Control Limit

J. Tracking Signal
Calculate the tracking signal of the data presented below using mean absolute
deviation.
Month Actual Orders Forecast
1 33 32
2 35 35
3 40 42
4 47 45
5 45 45
6 49 47
7 42 48
8 35 38
9 35 35
10 39 39
11 40 43
12 42 45
Solutions:

CFE=∑ ( actual−forecast )
CFE
TS=
MAD
Month Actual Orders Forecast actual-forecast |actual-forecast|
1 33 32 1 1
2 35 35 0 0
3 40 42 -2 2
4 47 45 2 2
5 45 45 0 0
6 49 47 2 2
7 42 48 -6 6
8 35 38 -3 3
9 35 35 0 0
10 39 39 0 0
11 40 43 -3 3
12 42 45 -3 0
Σ = -12 Σ = 22

CFE = -12
TS = -12 / 22 = -0.55