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Revision Sheet
Answer Key

Formulas: (Forecasting)
1. Linear trends can be found using the least squares
Technique:

𝒚 = 𝒂 + 𝒃𝒙

2. Equations to calculate the regression variables:

∑𝒙𝒚 − 𝒏𝒙𝒚
𝒃 =
∑𝒙𝟐 − 𝒏𝒙𝟐

𝒂 = 𝒚 − 𝒃𝒙

3. Equations to calculate the moving average:

𝑫𝒆𝒎𝒂𝒏𝒅 𝒊𝒏 𝒑𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝒏 𝒑𝒆𝒓𝒊𝒐𝒅𝒔

𝑴𝒐𝒗𝒊𝒏𝒈 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 =
𝒏


4. Mean Absolute Deviation (MAD):

∑ 𝑨𝒄𝒕𝒖𝒂𝒍 − 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕
𝑴𝑨𝑫 =
𝒏

5. Mean Absolute Percent Error (MAPE):

∑𝟏𝟎𝟎× 𝑨𝒄𝒕𝒖𝒂𝒍 − 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕 ÷ 𝑨𝒄𝒕𝒖𝒂𝒍

𝑴𝑨𝑷𝑬 =
𝒏

6. Mean Squared Error (MSE):

∑(𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕 𝑬𝒓𝒓𝒐𝒓𝒔)𝟐
𝑴𝑺𝑬 =

Question 1: Forecasting

McDonald's serves a range of dishes, including the Big Mac, Chicken McNuggets, Iced Coffee,
Fries, and McFlurry, and many others. The executives are undertaking research in order to
forecast demand. Consider the information below:

YEAR QUARTER DEMAND

1 80
2 90
3 100
2019 4 150
1 95
2 90
3 83
2020 4 70
1 200
2 150
3 130
2021 4 99

1. Using "Least Squares Method", calculate "b" the slope of the regression line and "a" y-
axis intercept.

Solution:

X Y 𝒙𝟐 𝒙 × 𝒚
1 80 1 80
2 90 4 180
3 100 9 300
4 150 16 600
5 95 25 475
6 90 36 540
7 83 49 581
8 70 64 560
9 200 81 1800
10 150 100 1500
11 130 121 1430
12 99 144 1188
∑X = 78 ∑Y= 1337 𝟐 ∑X Y = 9234
∑𝒙 = 650

X- = ∑X / 12 = 78/12 = 6.5

Ȳ = ∑Y / 12 = 1337/12 = 111.41
 ∑𝒙𝒚 − 𝒏𝒙𝒚
𝒃 =
∑𝒙𝟐 − 𝒏𝒙𝟐

GHIJKLH×(M.OPLLL.JL)
=
MOQKLH×(M.OR )

=> b = 3.80

𝒂 = 𝒚 − 𝒃𝒙

= 111.41 − 3.80× 6.5

=> a = 86.71

Using 4-quarter Moving Average, answer the following question.

The actual sales for the "Quarters" of year 2022 are as follows:

Year 4 – Actual Sale

150
130
160
140

2. Calculate the Mean Absolute Deviation "MAD" and Mean Absolute Percentage Error
"MAPE".

Solution:

For X = 13 => Forecast (Moving Average) = (99 + 130 + 150 + 200) / 4 = 144.75
For X = 14 => Forecast (Moving Average) = (150 + 99 + 130 + 150) / 4 = 132.25
For X = 15 => Forecast (Moving Average) = (130 + 150 + 99 + 130) / 4 = 127.25
For X = 16 => Forecast (Moving Average) = (160 + 130 + 150 + 99) / 4 = 134.75

Error = 𝐴𝑐𝑡𝑢𝑎𝑙 − 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡

effgf
%Error = × 100
hijklm

X Actual Forecast Error %Error

13 150 144.75 5.25 3.5
14 130 132.25 2.25 1.73076923
15 160 127.25 32.75 20.46875
16 140 134.75 5.25 3.75
∑Error = 45.5 ∑%Error = 29.44
 MAD = ∑Error / 4 = 45.5 / 4 = 11.375

MAPE = ∑%Error / 4 = 29.44 / 4 = 7.36

Question 2: Forecasting

Nike sells a wide range of items, including T-shirts, Shoes, Bags, and many
others. The managers are undertaking research to forecast demand. Consider
the following information:

YEARS
Months 1 2 3
JAN 45 50 100
FEB 60 100 80
MAR 77 75 70
APR 85 60 140
MAY 90 80 100
JUN 100 80 75
JUL 110 120 130
AUG 70 140 105
SEP 65 85 60
OCT 88 70 85
NOV 80 65 80
DEC 85 70 100

Note: Round to 2 decimal places

1. Using "Seasonal index", calculate the seasonal index of March and November.

Solution:

AVG Year (March) = (77 + 75 + 70) / 3 = 74

AVG Month (March) = ∑AVG Year / 12 = 1025 / 12 = 85.42

Seasonal index of (March) = AVG Year / AVG Month = 74 / 85.42 = 0.87

 AVG Year (November) = (80 + 65 + 80) / 3 = 75

AVG Month (November) = ∑AVG Year / 12 = 1025 / 12 = 85.42

Seasonal index of (November) = AVG Year / AVG Month = 75 / 85.42 = 0.88

Months 2019 2020 2021 AVG Year AVG Seasonal Month

Month index
1 45 50 100 65 85.42 0.76 JAN
2 60 100 80 80 85.42 0.94 FEB
3 77 75 70 74 85.42 0.87 MAR
4 85 60 140 95 85.42 1.11 APR
5 90 80 100 90 85.42 1.05 MAY
6 100 80 75 85 85.42 1 JUN
7 110 120 130 120 85.42 1.4 JUL
8 70 140 105 105 85.42 1.23 AUG
9 65 85 60 70 85.42 0.82 SEP
10 88 70 85 81 85.42 0.95 OCT
11 80 65 80 75 85.42 0.88 NOV
12 85 70 100 85 85.42 1 DEC
∑AVG Year = 1025
 If the expected demand of Year 4 = 1900

The actual sales of Year - 4 are shown below:

Months Actual Sales –

Year 4
JAN 122
FEB 145
MAR 135
APR 173
MAY 168
JUN 160
JUL 225
AUG 196
SEP 131
OCT 153
NOV 143
DEC 160

2. Calculate the Mean Absolute Deviation "MAD" and Mean Squared Error "MSE".

Solution:

ePnoijop qorlsp gt uolf J

Forecast (For each Month) = × 𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑖𝑛𝑑𝑒𝑥 𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑚𝑜𝑛𝑡ℎ
LH

LGQQ
Example: Forecast (JAN) = × 0.76 = 120.33
LH

=> Same for all Months to get the forecast…

Error (For each Month) = 𝑨𝒄𝒕𝒖𝒂𝒍 − 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕

Example: Error (JAN) = 122 − 120.33 = 1.67

=> Same for all Months to get the Error…

Months 2019 2020 2021 AVG AVG Seasonal Month Forecast Error Actual
Year Month index Year
4
1 45 50 100 65 85.42 0.76 JAN 120.33 1.67 122
2 60 100 80 80 85.42 0.94 FEB 148.83 3.83 145
3 77 75 70 74 85.42 0.87 MAR 137.75 2.75 135
4 85 60 140 95 85.42 1.11 APR 175.75 2.75 173
5 90 80 100 90 85.42 1.05 MAY 166.25 1.75 168
6 100 80 75 85 85.42 1 JUN 158.33 1.67 160
7 110 120 130 120 85.42 1.4 JUL 221.67 3.33 225
8 70 140 105 105 85.42 1.23 AUG 194.75 1.25 196
9 65 85 60 70 85.42 0.82 SEP 129.83 1.17 131
10 88 70 85 81 85.42 0.95 OCT 150.42 2.58 153
11 80 65 80 75 85.42 0.88 NOV 139.33 3.67 143
12 85 70 100 85 85.42 1 DEC 158.33 1.67 160
∑Error =
28.09

MAD = ∑Error / 12 = 28.09 / 12 = 2.34

∑(𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕 𝑬𝒓𝒓𝒐𝒓𝒔)𝟐
𝑴𝑺𝑬 = = 75.37 /12 = 6.28
𝒏

Formulas: (Location Strategies)
1. Factor – Rating:

𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒔𝒄𝒐𝒓𝒆𝒔 𝒇𝒐𝒓 𝒆𝒂𝒄𝒉 𝒍𝒐𝒄𝒂𝒕𝒊𝒐𝒏

= 𝑭𝒂𝒄𝒕𝒐𝒓 𝟏 𝒘𝒆𝒊𝒈𝒉𝒕 × 𝒍𝒐𝒄𝒂𝒕𝒊𝒐𝒏 𝑺𝒄𝒐𝒓𝒆 𝒐𝒇 𝒇𝒂𝒄𝒕𝒐𝒓 𝟏
+ 𝑭𝒂𝒄𝒕𝒐𝒓 𝟐 𝒘𝒆𝒊𝒈𝒉𝒕 × 𝒍𝒐𝒄𝒂𝒕𝒊𝒐𝒏 𝑺𝒄𝒐𝒓𝒆 𝒐𝒇 𝒇𝒂𝒄𝒕𝒐𝒓 𝟐 + ⋯


2. Locational Cost-Volume Analysis:

𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 + (𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 × 𝑽𝒐𝒍𝒖𝒎𝒆)

3. Crossover point for locations 1 and 2:

𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 𝟏 = 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 𝟐

𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 𝟏 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 𝟏 𝒙 = 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 𝟐 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 𝟐 𝒙

𝒕𝒉𝒆𝒏 𝒈𝒆𝒕 𝒕𝒉𝒆 𝒗𝒂𝒍𝒖𝒆 𝒙 = ⋯


4. Center of Gravity Method:
∑𝒅𝒊𝒙 × 𝑸𝒊
𝑿 − 𝒄𝒐𝒐𝒓𝒅𝒊𝒏𝒂𝒕𝒆 𝒐𝒇 𝒄𝒆𝒏𝒕𝒆𝒓 𝒐𝒇 𝒈𝒓𝒂𝒗𝒊𝒕𝒚 =
∑𝑸𝒊

∑𝒅𝒊𝒚 × 𝑸𝒊
𝒀 − 𝒄𝒐𝒐𝒓𝒅𝒊𝒏𝒂𝒕𝒆 𝒐𝒇 𝒄𝒆𝒏𝒕𝒆𝒓 𝒐𝒇 𝒈𝒓𝒂𝒗𝒊𝒕𝒚 =
∑𝑸𝒊

Where:

dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to or from location i
Question 3: Location Strategies

Company XYZ intends to expand and construct a new factory in one of three locations. Bob, the
decision-maker, has concluded that five key success factors may be utilized to evaluate the
potential locations.

Factor Factor Description Weight

1 Labor Cost 0.4
2 Transportation Cost 0.2
3 Market Access 0.2
4 Raw Materials Cost 0.1
5 Utility Cost 0.1

Moreover, Company XYZ has assigned a score of 100 to each location for each factor. The
results are as follows:

Locations
Factor A B C
1 70 80 90
2 80 80 60
3 90 70 60
4 50 70 90
5 80 90 70

1. Calculate the "weighted scores" for A, B, and C.

Solution:

A = (0.4x70) +(0.2x80) +(0.2x90) +(0.1x50) + (0.1x80) = 75

B = (0.4x80) +(0.2x80) +(0.2x70) +(0.1x70) + (0.1x90)) = 78

C = (0.4x90) +(0.2x60) +(0.2x60) +(0.1x90) + (0.1x70) = 76

2. Which location you would choose? Justify your answer.

Locate in B, since it has highest weight = 78

Question 4: Location Strategies

Due to the increase number of customers, Zara is considering opening new stores
to serve all customers. The fixed and variable costs of the possible store locations
are placed in the table below:

Store Fixed Cost Variable Cost

X 120,000 600

Y 90,000 700

Z 135,000 650

Location X coordinator Y coordinator

X 45 50

Y 30 40

Z 75 90

1. Calculate the " Cross-Over point of X & Y " and " Cross-Over point of Y & Z “, then
determine best location to produce 1000 units (Justify your answer).

Solution:

For (X & Y):

120,000 + 600X = 90,000 + 700X

30,000 = 100X

=> X = 300

For (B & C):

90,000 + 700X = 135,000 + 650X

45,000 = 50X

=> X = 900
 For X = 1000 => Best location is X since Total Cost of X = 120,000 + 600x (1000) =
720,000 < B and C

2. If the load is distributed equally between the three location, what is the center of gravity
for the three location?

X coordinator = (45 + 30 + 75) / 3 = 50

Y coordinator = (50 + 40 + 90) / 3 = 60

=> Center of gravity = (50,60)

 Question 5: Decision Tree
Company X can either buy or redesign a product. If the company decides to buy, there is a
70% chance that it will pay 85000$ as fixed cost and variable cost 2$ each item, and a 30%
chance that it would pay 100,000$ as fixed cost and variable cost 1$ per item.

Company X must spend 30,000 dollars to obtain a new machine in order to redesign the
product. The firm has 80% chance to produces the products and 20% chance to produce
nothing. To produce the products, there is a 50% chance of hiring new engineers at an extra
cost of 60,000$ and a variable cost of 1.2$ each product, and a 50% chance of using existing
staff at an additional cost of 40,000$ and a variable cost of 1$ per item.

If the company product’s demand quantity is 10,000 unit.

1. Calculate the EMV of the two choices (buying and redesigning).

Solution:

Purchasing
70% 30%
FC=85,000 FC=100,000
VC=2*10,000=20,000 VC=1*10,000=10,000
Total Cost=105,000 Total Cost=110,000

EMV purchasing= (0.7*105,000) +(0.3*110,000) = $106,500

Redesigning
80% 20%

50% (Engineer) 50% (Staff) Machine=30,000

Machine=30,000 Machine=30,000
Add-Cost= 60,000 Add-cost=40,000
VC=1.2*10,000=12000 VC=1*10,000=10,000
Total Cost=102,000 Total Cost=80,000

EMV 80%= (0.5*102,000) +(0.5*80,000) = 91,000

EMV Redesigning= (0.8*91,000) +(0.2*20,000) = 76,800

2. Which choice is better (buying or redesigning)? Explain.

AS the company is using the cost to evaluate the two options, it is better to select the smallest
EMV=$76,800. The company has to choose Redesigning process.
 Question 6: Decision Tree

JDI, Inc. is trying to decide whether to make or buy a part (#J-45FPT). Purchasing the part would
cost $1.50 each. If they design and produce it themselves, it will result in a per unit cost of $0.75.
However, the design investment would be $50,000. Further, they realize that for this type of part,
there is a 70% chance that the part will be successful, and 30% chance that the part will need to
be redesigned at an additional cost of $50,000.

Regardless of whether they make or buy the part, JDI will need 100,000 of these parts.

1. Calculate the EMV of the two choices (make and buy).

Solution:

2. Which choice is better (make or buy)? Explain.

Since the expected values represent costs, JDI should select the lowest expected value, and Make
the part. Its expected monetary value (cost) is $140,000 versus $150,000 for the buy decision.