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Forecasting Methods:Moving Average and Exponential Smoothing

The K&M company has the following historical sales data:

Year Sales
2001 $200,000
2002 $300,000
2003 $270,000
2004 $280,000
2005 $320,000

1) Using the moving average method, predict sales for 2006 using the data for all of the years provided.

2) Using the exponential smoothing and that data for all of the years provided, predict sales for 2006. Assume that the most recent years are the most representative of future sales. In other words, 2005 is more representative of future sales than 2004, that 2004 is more representative than 2003, etc.

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Solution Preview

Hello Student,

For question 1, you have been asked to calculate the sales for 2006 using the moving average method. To help you better understand how moving averages are calculated, note the following excerpt:

"One of the easiest, most common time series forecasting techniques is that of the moving average. Moving average methods come in handy if all you have is several consecutive periods of the variable (e.g., sales, new savings accounts opened, workshop attendees, etc.) you're forecasting, and no other data to predict what the next period's value will be. Often, using the past few months of sales to predict the coming month's sales is preferable to unaided estimates. However, moving average methods can have serious forecasting errors if applied carelessly.....Essentially, moving averages try to estimate the next period's value by averaging the value of the last couple of periods immediately prior. Let's say that you have been in business for three months, January through March, and wanted to forecast April's sales. Your sales for the last three months look like this:

Month Sales ($000)

January 129

February 134

March 122

The simplest approach would be to take the average of January through March and use that to estimate ...

Solution Summary

This solution provides you with general information about the moving average and exponential smoothing methods of forecasting. It shows you how to estimate or predict sales for a given year based on data provided for previous years. The solution is adequately referenced.