Question

Dell uses the CR5 chip in some of its laptop computers. The prices for the chip during the past 6 months were as follows: Month Actual

Price per Chip

1 1.90

2 1.65

3 1.70

4 1.85

5 1.90

6 1.87

a. Use a 2-month moving average to forecast demand from month 4 to month 6

b. Use a 3-month moving average to forecast demand from month 4 to month 6.

c. Which forecasting is better (Using the mean absolute deviation): the 2- month average or the 3-month average?

Answer 1

units	Price	2 month moving average	2 months moving average	Absolute Deviation	3 month moving average	3 month moving average	Deviatiom
1	1.9
2	1.65
3	1.7
4	1.85	(1.65+1.7)/2	1.675	0.175	(1.9+1.65+1.7)/3	1.750	0.100
5	1.9	(1.7+1.85)/2	1.775	0.125	(1.65+1.7+1.85)/3	1.733	0.167
6	1.87	(1.85+1.9)/2	1.875	0.005	(1.7+1.85+1.9)/3	1.817	0.053
			Sum	0.305			0.32
	MAD = Sum(A-F)/n
For 2 month moving average = 0.305/3=0.102
For 3 month moving average = 0.32/3=0.107
As MAD is slightly higher for 3 months moving average, so the accurate method will be the 2-month moving average method.