Chapter 11—Forecasting and Demand Planning

TRUE/FALSE

1. Better operational decisions can be made by integrating forecasting with value chain and capacity
management systems.

ANS: T PTS: 1

2. Top managers use detailed forecasts of unit sales for individual products (e.g., brands and sizes) for
decisions involving financial planning and for sizing and locating new facilities.

ANS: F PTS: 1

3. Long range forecasts expressed in sales dollars are more meaningful to top managers than to managers
at the operations level.

ANS: T PTS: 1

4. Another name for planning horizon is time bucket.

ANS: F PTS: 1

5. A long-range forecast typically covers a planning horizon of 3 to 12 months.

ANS: F PTS: 1

6. All time series contain random variation but may not contain trend or seasonal components.

ANS: T PTS: 1

7. Trends are characterized by repeatable periods of ups and downs over short periods of time.

ANS: F PTS: 1

8. Seasonal patterns can occur over the weeks during a month, over days during a week, or hours during
a day.

ANS: T PTS: 1

9. Because of random variations, forecasts are never 100% accurate.

ANS: T PTS: 1

10. In forecasting, irregular variation that is explainable can normally be discarded.

ANS: T PTS: 1

11. Aggregate forecasts are generally much easier to develop whereas detailed forecasts require more time
and resources.

ANS: T PTS: 1

OM3 Test Bank Chapter 11 1

12. A major difference between MSE and MAD is that MAD is influenced much more by large forecast
errors than by small errors.
ANS: F PTS: 1

13. MAD, MSE, and MAPE forecast error metrics generally give similar numerical results so it doesn't
matter which one is used.

ANS: F PTS: 1

14. Statistical forecasting is based upon the assumption that the future will be an extrapolation of the past.

ANS: T PTS: 1

15. A single moving average is most appropriate for data with identifiable trends.

ANS: F PTS: 1

16. As the value of k is increased in a moving average forecasting model, the forecast reacts more slowly
to recent changes in the time series.

ANS: T PTS: 1

17. Exponential smoothing models "never forget" past data as long as the smoothing constant is strictly
between 0 and 1. In contrast, moving average methods "completely forget" all data older than k
periods in the past.

ANS: T PTS: 1

18. In an exponential smoothing model, larger values of alpha (i.e., closer to 1) place less emphasis on
recent data and more on older data.

ANS: F PTS: 1

19. In a regression model, both the dependent and independent variables must be numerical.

ANS: T PTS: 1

20. An R2 of 0.70 mean 30% of the variability in the dependent variable was explained by the independent
variable.

ANS: F PTS: 1

21. Regression models are often used in forecasting to incorporate causal variables that may influence a
time series.

ANS: T PTS: 1

22. An exponential smoothing model can be found easily by applying the Excel Add Trendline option to a
time series.

ANS: F PTS: 1

OM3 Test Bank Chapter 11 2

 23. Judgmental forecasting should only be used if no historical data are available.
ANS: F PTS: 1

24. The Delphi method is a forecasting approach that is based on expert opinion.

ANS: T PTS: 1

25. In practice, managers rely almost exclusively on statistical forecasts.

ANS: F PTS: 1

26. Single exponential smoothing with a smoothing constant value of .25 puts the same weight on the
most recent actual demand as a 4-period moving average.

ANS: T PTS: 1

27. Single exponential smoothing is a forecasting technique that uses a weighted average of
past time-series values to forecast the value of the time series in the next period.

ANS: T PTS: 1

28. The smoothing constant, , used in the basic exponential smoothing model, can range in
value from -1 to +1.

ANS: F PTS: 1

29. A major difference between forecast accuracy measures MAD and MSE is that MAD is
influenced much more by large forecast errors than by small errors.

ANS: F PTS: 1

30. Irregular variation and random variation both refer to unexplainable deviation of a time
series from a predictable pattern.

ANS: F PTS: 1

MULTIPLE CHOICE

1. ____ forecasts are needed to plan work-force levels, allocate budgets among divisions and schedule
jobs and resources.
a. Long-range
b. Intermediate-range
c. Short-range
d. Demand planning
ANS: B PTS: 1

2. ____ forecasts are needed to plan for facility expansion.

a. Long-range
b. Intermediate-range
c. Short-range
d. Demand planning

OM3 Test Bank Chapter 11 3

 ANS: A PTS: 1

3. ____ forecasts are needed for planning production schedules and to assign workers to jobs.
a. Long-range
b. Intermediate-range
c. Short-range
d. Demand planning
ANS: C PTS: 1

4. Which of the following is not one of the five characteristics of a time series?
a. Time bucket
b. Trend
c. Cyclical
d. Random variation
ANS: A PTS: 1

5. A(n) ____ is a one-time variation that is explainable.

a. Cyclical pattern
b. Random Variation
c. Irregular variation
d. Seasonal pattern
ANS: C PTS: 1

6. Repeatable periods of ups and downs over short periods of time are called ____.
a. Trends
b. Seasonal patterns
c. Cyclical patterns
d. Irregular variation
ANS: B PTS: 1

7. Regular patterns in a data series that take place over long periods of time are called ____.
a. Trends
b. Seasonal patterns
c. Cyclical patterns
d. Irregular variation
ANS: C PTS: 1

8. The forecasting error measurement that is different in that the measurement scale factor is eliminated
is
a. MSE
b. MAD
c. RMSE
d. MAPE
ANS: D PTS: 1

9. Which of the following is not a statistical method?

a. Delphi
b. Exponential smoothing
c. Moving average
d. Linear regression

OM3 Test Bank Chapter 11 4

 ANS: A PTS: 1

10. A moving average model works best when ____ in the time series.
a. Only irregular variation is present
b. Only a trend is present
c. There is no trend, seasonal, or cyclical pattern
d. Trend, seasonal, and cyclical patterns all exist
ANS: C PTS: 1

11. For single exponential smoothing,

a. Large values of alpha () place more emphasis on recent data
b. Small values of alpha () place more emphasis on recent data
c. Very volatile time series with substantial random variability should use a large value for
alpha ()
d. Very stable time series with little random variability should use small values for alpha ()
ANS: A PTS: 1

12. Which is not true regarding simple exponential smoothing?

a. Small values of alpha () place more emphasis on past data
b. Larger values of alpha () have the advantage of quickly adjusting the forecast
c. If alpha () equals zero, the forecast will never change
d. If alpha () equals one, the forecast will never change
ANS: D PTS: 1

13. If single exponential smoothing is used and the time series has a negative trend, the forecast will
a. Lag
b. Overshoot
c. Be on target
d. Have a MAD equal to zero
ANS: B PTS: 1

14. Regression analysis

a. Is limited to one dependent and one independent variable
b. Is best with linear relationships
c. Maximizes the sum of the squared deviations between the actual time series value and the
estimated values of the dependent variable
d. Can be used with time as the independent variable
ANS: D PTS: 1

15. An R2 of 0.80 means

a. 80% of the variability in the independent variable is explained by the dependent variable
b. 80% of the variability in the dependent variable is explained by the independent variable
c. 80% of the variability in the dependent variable is not explained by the independent
variable
d. Multiple regression was used
ANS: B PTS: 1

16. If actual demand for a product is highly influenced by only random variation, the quantitative
technique to use for forecasting demand is

OM3 Test Bank Chapter 11 5

 a. Regression
b. Moving average
c. Mean Absolute Percentage Error (MAPE)
d. Delphi
ANS: B PTS: 1

17. Exponential smoothing...

a. Works best for long-term forecasting
b. Yields a mathematically optimal solution
c. Assigns weights to past data that decay exponentially as the data gets older
d. Cannot be adapted to handle trend
ANS: C PTS: 1

18. Which of the following does not fit with the Delphi method?
a. Group of experts
b. Brought together as a group
c. Process iterates until a consensus is reached
d. Qualitative as well as numerical outputs
ANS: B PTS: 1

19. All of the following are important in choosing a forecasting method except
a. Smoothing constant ()
b. Time span for which forecast is made
c. Data requirements
d. Quantitative skills needed
ANS: A PTS: 1

20. Which of the following is not a valid approach to gathering data for judgmental forecasting?
a. Questionnaire
b. Telephone contact
c. Personal interview
d. Company records
ANS: D PTS: 1

21. All of the following are important concepts in forecasting except

a. Determining the planning horizon length.
b. Determining the time bucket size (i.e., year, quarter, month, week, day, etc.).
c. Using a smoothing constant of 0.1 in Delphi methods of forecasting.
d. Identifying cyclical patterns.
ANS: C PTS: 1

22. A tracking signal provides a method for quantifying forecast

a. bias
b. error
c. accuracy
d. outliers
ANS: A PTS: 1

OM3 Test Bank Chapter 11 6

 23. A group of international experts published a set of principles of forecasting that includes all of the
following except
a. Use quantitative rather than qualitative methods.
b. Combine forecasts from approaches that are similar.
c. Ask experts to justify their forecasts in writing.
d. Use multiple measures of forecast accuracy.
ANS: B PTS: 1

SHORT ANSWER

1. Explain how forecasting is used at different levels of an organization.

ANS:
Top managers need long-range forecasts expressed in total sales dollars for use in financial planning
and for sizing and locating new facilities. At the middle management level, managers of the various
product groups need aggregate forecasts of sales volume for their products to establish production
plans. Finally, managers at the operational level need forecasts by brand and size to plan material
usage and production schedules.

PTS: 1

2. Discuss the three planning horizons used in forecasting and the types of decisions made in each.
ANS:
The planning horizon is the length of time on which a forecast is based.
Long-range forecasts cover a planning horizon of 1 to 10 years and are necessary to plan for
expansion of facilities and to determine future needs for land, labor and equipment.
Intermediate-range forecasts cover a 3- to 12-month period and are needed to plan work-force levels,
allocate budgets among divisions, establish purchasing plans, and schedule jobs and resources.
Short-range forecasts focus on the planning horizon of up to three months and are used by operations
managers to plan production schedules, assign workers to jobs, to determine short-term capacity
requirements and to aid shipping departments in planning transportation needs and establishing
delivery schedules.

PTS: 1

3. What is a time series, and what types of characteristics typically make up time series?

ANS:
A time series is a set of observations measured at successive points in time or over successive periods
of time. To explain the pattern of data in a time series, it is often helpful to think in terms of five
characteristics: trend, seasonal, cyclical, random variation, and irregular (one-time) variation.

A trend is the underlying pattern of growth or decline in a time series. This gradual shifting over time
is usually due to such long-term factors as changes in performance, technology, productivity,
population, demographic characteristics and customer preferences.

Seasonal patterns are characterized by repeatable periods of ups and downs over short periods of
time. Seasonal patterns usually conform to buyer behavior and different needs over the course of a
year, a quarter and so on.

OM3 Test Bank Chapter 11 7

 Cyclical patterns are regular patterns in a data series that take place over long periods of time. A
common example of a cyclical pattern is the movement of stock market values during "bull" and
"bear" market cycles.

Random variation (sometimes called noise)is the unexplained deviation of a time series from a
predictable pattern, such as a trend, seasonal, or cyclical pattern. Random variation is caused by short-
term, unanticipated, and nonrecurring factors and is unpredictable.

Irregular variation is one-time variation that is explainable.

PTS: 1

4. Define forecast error and describe ways that it is measured.

ANS:
Forecast error is the difference between the observed value of the time series and the forecast, or A t
 Ft. Three types of forecast error metrics are mean square error (MSE), mean absolute deviation
(MAD), and mean absolute percentage error (MAPE).

PTS: 1

5. Explain the difference between statistical forecasting and judgment forecasting.

ANS:
Statistical forecasting is based on the assumption that the future will be an extrapolation of the past.
Statistical methods can generally be categorized as time series methods, which extrapolate historical
time series data, and regression methods, which, in addition to extrapolating historical time series
data, can also include other potentially causal factors that influence the behavior of the time series.
Judgmental forecasting relies upon opinions and expertise of people in developing forecasts.
PTS: 1

6. Explain the difference between a moving average and single exponential smoothing forecasting model.

ANS:
A moving average (MA) forecast is an average of the most recent "k" observations in a time series.
Single exponential smoothing (SES) is a forecasting technique that uses a weighted average of past
time-series values to forecast the value of the time series in the next period. SES forecasts are based on
averages using and weighting the most recent actual demand more than older demand data. SES
models use all past data while MA models only use the most recent observations.

PTS: 1

7. Define regression analysis and explain how it is an approach to forecasting.

ANS:
Regression Analysis is a method for building a statistical model that defines a relationship between a
single dependent variable and one or more independent variables, all of which are numerical.

OM3 Test Bank Chapter 11 8

 An example of a simple regression model for forecasting is one in which the value of a time series (the
dependent variable) is a function of a single independent variable, time. In more advanced forecasting
applications, other independent variables such as economic indexes or demographic factors that might
influence the time series can be incorporated into a regression model. A linear regression model with
more than one independent variable is called a multiple regression model. Multiple regression
provides a technique for building forecasting models that not only incorporate time but other potential
causal variables.

PTS: 1

8. Explain judgmental forecasting, including grass roots forecasting and the Delphi Method.

ANS:
Judgmental forecasting relies upon opinion and expertise of people in developing forecasts. When no
historical data are available, only judgmental forecasting is possible. But even when historical data are
available and appropriate, they cannot be the sole basis for prediction. The demand for goods and
services is affected by a variety of factors, such as global markets and cultures, interest rates,
disposable income, inflation, and technology. Competitors’ actions and government regulations also
have an impact.

Grass roots forecasting is simply asking those who are close to the end consumer, such as salespeople,
about the customer’s purchasing plans.

The Delphi Method consists of forecasting by expert opinion by gathering judgments and opinions of
key personnel based on their experience and knowledge of the situation. The experts are not consulted
as a group so as not to bias their predictions, i.e. a dominant personality in the group. The responses
and supporting arguments of each individual are summarized by an outside party and returned to the
experts along with further questions. Experts whose opinions fall in the mid-range of estimates as well
as those whose predictions are extremely high or low might be asked to explain them. The process
iterates until a consensus is reached by the group.

PTS: 1

9. Describe some of the issues that managers must consider in applying forecasting methods in practice.

ANS:
In practice, managers use a variety of judgmental and quantitative forecasting techniques. Statistical
methods alone cannot account for such factors as sales promotions, competitive strategies, unusual
economic or environmental disturbances, new product introductions, large one-time orders, labor
union strikes, and so on. Many managers begin with a statistical forecast and adjust it to account for
such factors. Others may develop independent judgmental and statistical forecasts and then combine
them, either objectively by averaging or in a subjective manner. The choice of a forecasting method
depends on the time span for which the forecast is being made, the needed frequency of forecast
updating, data requirements, the level of accuracy desired, and the quantitative skills needed.

PTS: 1

PROBLEM

1. Using the data shown below, compute the mean square error, mean absolute deviation, and mean
absolute percentage error for the forecasts shown.

Month Forecast Demand Actual Demand

OM3 Test Bank Chapter 11 9

 April 170 180
May 225 200
June 210 200
July 260 240
August 200 230

ANS:
Mean square error = [(180  170)2 + (200  225)2 + (200  210)2 + (240  260)2 + (230  200)2] /5 =
425.0
Mean absolute deviation = (10 + 25 + 10 + 20 + 30)/5 = 19

Mean absolute percentage error = (.056 + .125 + .050 + .083 + .130)(100)/5 = 8.89%

PTS: 1

2. Sales of a new CD at a store for the last 4 weeks are shown below.

Week 1 2 3 4
Sales 112 105 125 118

a. Find a 3 period moving average forecast for the next week.

b. Find a 4 period moving average forecast for the next week.
c. Actual sales for week 5 were 105 units. What would be the 3- and 4-period moving
average forecasts for week 6?

ANS:
a. (105 + 125 + 118)/3 = 116

b. (112 + 105 + 125 + 118)/4 = 115

c. 3-period: (125 + 1118 + 105)/3 = 116

4-period: (105 + 125 + 118 + 105)/4 = 113.25

PTS: 1

3. Ed Rogers owns an appliance store. Sales data on a particular model of a DVD player for the past six
months are:

Month Sales
Jan 35
Feb 29
Mar 39
Apr 42
May 51
Jun 56

Forecast sales for July using an exponential smoothing model with a smoothing constant of 0.40.
Assume that the forecast for May was 36.25.

ANS:
FJUN = 36.25 + 0.4(51  36.25) = 42.15
FJUL = 42.15 + 0.4(56  42.15) = 47.69
PTS: 1

OM3 Test Bank Chapter 11 10

4. Ed Rogers owns an appliance store. Sales data on a particular model of a DVD player for the past six
months are shown below along with the results of two different forecasting models that were
developed t:
Month Sales Forecast 1 Forecast 2
Jan 35 30 33
Feb 29 28 32
Mar 39 43 35
Apr 42 40 45
May 51 48 52
Jun 56 55 52
Which is the better forecasting model, based on the MAD criterion?
ANS:
Month Sales Absolute Error, Forecast 1 Absolute Error, Forecast 2
Jan 35 5 2
Feb 29 1 3
Mar 39 4 4
Apr 42 2 3
May 51 3 1
Jun 56 1 4

MAD (Forecast 1) = 16/6 = 2.67

MAD (Forecast 2) = 17/6 = 2.83
Model 1 is the better model.

PTS: 1

5. Based on the information shown below, develop forecasts for June using both a 2-period moving
average model and an exponential smoothing model with  = 0.10. For the exponential smoothing
model, assume the forecast for February was 800.

Month Actual Demand

February 850
March 900
April 975
May 950

ANS:
Moving average model: FJUNE = (975 + 950)/2 = 962.5
Exponential smoothing model:
FFEB = 800
FMAR = 800 + .1(850  800) = 805
FAPR = 805 + .1(900  805) = 814.5
FMAY = 814.5 + .1(975  800) = 830.55
FJUN = 830.55 + .1(950  800) = 842.495
PTS: 1

OM3 Test Bank Chapter 11 11

6. The manager of a gas station along an interstate highway has observed that gasoline sales generally
increase each week over the summer months as more families travel by car on vacations. He also
believes that sales are sensitive to fluctuations in the price of gasoline. He developed the following
regression model:
Sales = 59407 + 509 (Week)  16463 (Price/gallon)

a. Interpret the coefficients of the independent variables in this model.

b. What is the sales forecast for the 11th week of the summer if the price per gallon is
estimated to be $3.00?

ANS:
a. Sales increase on average by 509 gallons per week during the summer months. An
increase in the price/gallon of $1 reduces weekly sales by 16,463 gallons; equivalently, a
$0.10 increase in the price of gas reduces weekly sales by 1,646 gallons.

b. Sales = 59407 + 509 (11)  16463 (3) = 15617 gallons

PTS: 1

7. A 7-month simple moving average would approximately equate with what alpha () factor for simple
exponential smoothing?

ANS:
 = 2/(k + 1) = 2/(7 + 1) = 0.25

PTS: 1

8. A Taiwan electronics company exports personal computers (PCs) to the U.S. Their PC
sales (in thousands) over the past five years are given below.

Year Sales
1 6
2 9
3 13
4 15
5 20

a. What is the regression equation if the company wants to predict sales?

b. What is the forecast for sales in year 6?

ANS:
a.
Sales (y) Year (x) x2 xy y2
6 1 1 6 36
9 2 4 18 81
13 3 9 39 169
15 4 16 60 225
20 5 25 100 400
63 15 55 223 911

a = [ (55) (63) - (15) (223)] / [(5) (55) - (15) (15)] = 120/50 = 2.4

OM3 Test Bank Chapter 11 12

 b = [(5) (223) – (15) (63)] / [(5( (55) – (15) (15)] = 170/50 = 3.4
Y = 2.4 + 3.4X
b. For year 6: Y = 2.4 + 3.4(6) = 22.8

PTS: 1

9. Consider the sales for six consecutive weeks for Sam’s Strawberries. The sales are in
“flats” sold.

Week Sales
1 16
2 18
3 14
4 10
5 20
6 22

a. Using a 3-period moving average, forecast the sales for weeks four through six.
b. Use exponential smoothing with  = .3 to forecast sales for weeks four through six.
c. Use linear regression (time series) to develop a prediction equation that will forecast
sales. Then use that prediction equation to get forecasts for weeks four through six.
d. Use MAD to pick the best forecasting method of A through C.

ANS:
a. Week 4: (16 + 18 + 14)/3 = 16.0
Week 5: (18 + 14 + 10)/3 = 14.0
Week 6: (14 + 10 + 20)/3 = 14.7

b. Ft = Ft-1 + (At-1  Ft-1)

F2 = 10 + .3(16 10) = 11.8
F3 = 11.8 + .3(18  11.8) = 13.7
F4 = 13.7 + .3(14  13.7) = 13.8
F5 = 13.8 + .3(10  13.8) = 12.7
F6 = 12.7 + .3(20  12.7) = 14.9

c.
x y xy x2
1 16 16 1
2 18 36 4
3 14 42 9
4 10 40 16
5 20 100 25
6 22 132 36
21 100 366 91

Y = 13.467 + .914X
Week 4: 13.467 + .914(4) = 17.1
Week 5: 13.467 + .914(5) = 18.0
Week 6: 13.467 + .914(6) = 19.0

MA ES LR
Week Actual Forec. |Dev.| Forec. |Dev.| Forec. |Dev.|

OM3 Test Bank Chapter 11 13

 4 10 16.0 6.0 13.8 3.8 17.1 7.1
5 20 14.0 6.0 12.7 7.3 18.0 2.0
6 22 14.7 7.3 14.9 7.1 19.0 3.0
19.3 18.2 12.1

MAD MA: 19.3/3 = 6.43

MAD ES: 18.2/3 = 6.07
MAD LR: 12.1/3 = 4.03
Linear regression has the lowest MAD.

PTS: 1

10. Valentine's Day is the best day of the year for selling roses at River Road Florist. Dozens
of roses sold on Valentine's Day over six years are as follows:

Year Dozen
2005 104
2006 109
2007 101
2008 114
2009 104
2010 100

a. What is the forecast for Valentine's Day in 2011 using a 3-period moving average?
b. What is the forecast for Valentine's Day in 2011 using a 5-period moving average?
d. What is the MAD for years 2008 - 2010 using a 3-period moving average?
e. What is the tracking signal for years 2008 - 2010 using a 3-period moving average?

ANS:
a. F(2011) = (114 + 104 + 100)/3 = 106.00

b. F(2011) = (109 + 101 + 114 + 104 + 100)/5 = 105.6

c. F(2008) = (104 + 109 + 101)/3 = 104.67

F(2009) = (109 + 101 + 114)/3 = 108.00
F(2010) = (101 + 114 + 104)/3 = 106.33
MAD = (9.33 + 4.00 + 6.33)/3 = 6.55

d. TS = (9.33 - 4.00 - 6.33)/6.55 = -.153

PTS: 1

11. The Espresso Cart has had the following pattern of espresso sales over the last two weeks:

Week 1 Week 2
Monday 873 Monday 912
Tuesday 904 Tuesday 859
Wednesday 911 Wednesday 906
Thursday 887 Thursday 900
Friday 899 Friday ?

What is the forecast for Friday's sales using a three-day moving average?

OM3 Test Bank Chapter 11 14

 ANS:
F(Friday) = (859 + 906 + 900)/3 = 888.33

PTS: 1
12. State Division of Motor Vehicles (DMV) statistics show the rate of new driver's license
applications to be as shown below:

Month Week Applica-

tions
April 1 238
2 199
3 215
4 212
May 1 207
2 211
3 196
4 206

a. Using a 3-week moving average, what is the forecast for the first week in April?
b. Using a 5-week moving average, what is the forecast for the first week in April?

ANS:
a. F(April, 1) = (211 + 196 + 206)/3 = 613/3 = 204.33

b. F(April, 1) = (212 + 207 + 211 + 196 + 206)/5 = 1032/5 = 206.4

PTS: 1

13. The following data represents the home mortgage loan interest rates at a local bank over an
eight-month period:

Month Rate (%) Month Rate (%)

1 8.7 5 8.6
2 8.7 6 8.4
3 8.6 7 8.8
4 8.6 8 8.8

a. What is the forecast for month 8 using a moving average model with an AP = 4?
b. What is the forecast for month 9 using a moving average model with an AP = 6?

ANS:
a. F(Day 8) = (8.8 + 8.4 + 8.6 + 8.6)/4 = 8.60

b. F(Day 9) = (8.8 + 8.8 + 8.4 + 8.6 + 8.6 + 8.6)/6 = 8.63

PTS: 1

14. Community General Hospital finds itself treating many bicycle accident victims. Data from
the last seven 24-hour periods is shown below:

Day Bicycle Victims

OM3 Test Bank Chapter 11 15

 1 6
2 8
3 4
4 7
5 9
6 9
7 7

a. What is the forecast for day 4 using a moving average model with AP = 3?
b. With an alpha value of .5 and a starting forecast in day 4 equal to the actual data, what
is the exponentially smoothed forecast for day 8?
c. What is the MAD for days 6 to 8 for an exponentially smoothed forecasting model with
an alpha value of .5 and a starting forecast in day 4 equal to the actual data?
d. What is the tracking signal for days 6 to 8 for an exponentially smoothed forecasting
model with an alpha value of .5 and a starting forecast in day 4 equal to the actual data?

ANS:
a. F (Day 4) = (4 + 8 + 6) / 3 = 6

b. F(Day 5) = 7 + .5(7  7) = 7.00

F(Day 6) = 7 + .5(9  7) = 8.00
F(Day 7) = 8 + .5(9  8) = 8.50
F(Day 8) = 8.5 + .5(7  8.5) = 7.75

c. MAD = (2.0 + 1.0 + 1.5)/3 = 1.50

d. TS = (2.0 + 1.0 1.5)/1.50 = 1.00

PTS: 1

15. A major biotechnology company has developed a new drug for arthritis victims using
gene-splicing technology. It has been on the market for five months and has experienced
the following sales (in thousands of dollars):

Month Sales
January 26
February 32
March 34
April 34
May 36

a. What is the exponential smoothing forecast for May assuming that January sales is also
the initial forecast and the alpha value is .5?
b. What is the exponential smoothing forecast for May assuming that January sales is also
the initial forecast and the alpha value is .8?
c. What is the MAD for exponentially smoothed forecasts for months March to May as-
suming that January sales is also the initial forecast and the alpha value is .5?
d. What is the MAD for exponentially smoothed forecasts for months March to May as-
suming that January sales is also the initial forecast and the alpha value is .8?
e. What is the tracking signal for exponentially smoothed forecasts for months March to
May assuming that January sales is also the initial forecast and the alpha value is .5?
f. What is the tracking signal for exponentially smoothed forecasts for months March to
May assuming that January sales value is .8?

OM3 Test Bank Chapter 11 16

ANS:
a. F(February) = 26 + .5(26  26) = 26
F(March) = 26 + .5(32  26) = 29
F(April) = 29 + .5(34  29) = 31.5
F(May) = 31.5 + .5(34  31.5) = 32.75

b. F(February) = 26 + .8(26  26) = 26

F(March) = 26 + .8(32  26) = 30.8
F(April) = 30.8 + .8(34  30.8) = 33.36
F(May) = 33.36 + .8(34  33.36) = 33.87

c. MAD = (6 + 5 + 2.5)/3 = 13.5/3 = 4.50

d. MAD = (6 + 3.2 + .64)/3 = 3.28

e. TS = (6 + 5 + 2.5)/4.50 = 3.00

f. TS = (6 + 3.2 + .64)/3.28 = 3.00

PTS: 1

OM3 Test Bank Chapter 11 17