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CYNTHIA M.

FERRER
MSEM
Forecasting

SCHOOL OF ENGINEERING AND ARCHITECTURE


HOLY ANGEL UNIVERSITY
FORECASTING
Assignment No. 3

PROBLEMS
P1. The data below consist of the closing price of the common stock of the American Telephone and
Telegraph Corporation on 10 recent trading days.
Time(t) Price Time(t) Price
1 $24.10 6 $22.73
2 23.80 7 22.60
3 23.39 8 21.76
4 22.90 9 22.14
5 22.10 10 21.69
a. Using a five-period moving average, forecast the price of the stock for period 10.
T5-9 = (22.10 + 22.73+22.60+21.76+22.14)/5 = 22.27

b. What is the error of the forecast in #1-a?


Forecast Error = 22.27 – 21.69 = 0.58

c. Using a five-period moving average, forecast the price of the stock for period 11.
T6-10 = (22.73+22.60+21.76+22.14+21.69)/5 = 22.187

P2. A product is manufactured in distinct batches of various sizes. The cost accountant wished to
obtain an equation to use for estimating the cost of a batch. He obtained data on a number of
batches, consisting of the size of the batch, measured in number of pieces, and the total cost of the
batch, consisting of the setup cost and the variable costs of labor, material, etc. Costs are stated in
thousands of dollars.

Size of Cost of
Batch Batch
20 $1.4
30 3.4
40 4.1
50 3.8
70 6.7
80 6.6
100 7.8
120 10.4
150 11.7

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Forecasting

a. Which is the dependent variable? The independent variable?


The independent variables are the Size of Batch and the dependent variables are the Cost
of Batch.

b. Draw the scatterplot of this data. Does a straight line look like a reasonable fit?

The given data has a reasonable fit in a straight line pattern, and it shows the relationship
between the x and y axis. When the size of batch increases it also increases the cost of
batches.

c. Obtain ∑ x 2 , ∑xy, and ∑ y 2 .

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CYNTHIA M. FERRER
MSEM
Forecasting

d. What is the value of the slope of the regression line that best fits this data?
Y = a + bx
b = ∑xy – n xy a=y -bx
2 2
∑x – nx

b = 5,264 – 9(73.33 x 6.21) / 63,600 – 9(73.33 x 73.33) = 0.08

a = 6.21 – 0.08 x 73.33 = 0.59


Y = 0.59 + 0.08x

e. What is the interpretation of the slope?

Y = 0.59 + 0.08x

The slope is positive of 0.0.8

f. What is the value of the y intercept?


The value of the y intercept 0.59 indicates the average of cost per batch of the production.

g. What is the interpretation of the y intercept?


The slope is positive of 1, when x increase by 20, y increase by 2. The y intercept by 0.59.

h. Estimate the cost of a batch of 125 pieces.


Y = 0.59 + 0.08 x 125
Y = $10.59

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Forecasting

i. What is the value of the coefficient of correlation? Does it appear to indicate a high degree of
association between the size of the batch and the cost?
Coefficient of correlation:

b = n∑xy - ∑x∑y

n∑x2 – (∑x)2 n∑y2 – (∑y)2

Calculate the numerator:


n∑ty - ∑t∑y = (9 x 5,264) – (660 x 55.90) = 10,482

Calculate the denominator


n∑x2 – (∑x)2 n∑y2 – (∑y)2 = (9 x 63,600) – (660)2 x (9 x 439.11) –(55.90)2
= 10,637.59
r = 10,482 / 10,637.59 = 0. 985
Interpretation of result: There is a 98.5% correlation between the size of batches and the cost
of batches since r is very close to 1.

j. What is the value of r 2 ?


r2 = 98.50%

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CYNTHIA M. FERRER
MSEM
Forecasting

P3. The president of the Rich and Greene College of Business Administration wishes to forecast the
enrollment for next fall. The enrollment is measured in Full Time Equivalents (FTE), which
represent the number of full-time students, which is equivalent to the existing mixture of full-time
and part-time students. Data representing the fall enrollment for the past ten years is given
below:
time(t) Enrollmen
t
1 907
2 981
3 1014
4 1015
5 1050
6 1071
7 1123
8 1118
9 1175
10 1216
a. Draw a scatterplot. Does the data appear to contain a linear trend?

The scatterplot shows a positive, linear trend between the number of student enrolled and the
number of years.

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Forecasting

b. Obtain the ∑t, ∑y, and ∑ty.

c. What is the value of the slope?


Y = a + bx
b = ∑ty – n ty a=y -bt
2 2
∑t – nt

b = 61,187 – 10 (5.50 * 1,067) / (385)2 – 10 (5.50 x 5.50) = 30.33


a = 1,067 – 30.33 x 5.50 = 900.2
Y = 900.20 – 30.33x

d. What is the interpretation of the slope?

Y = 900.20 + 30.33x

The slope is positive of 30.33.

e. What is the value of the y intercept?


The value of the y intercept 900.20 indicates the average of enrollment for the given time.

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CYNTHIA M. FERRER
MSEM
Forecasting

f. What is the interpretation of the y intercept?


The intercept of y when time increases the number of enrollees increases which represented
by y variables.

g. Forecast the enrollment for next fall.


Coefficient of correlation:
b = n∑xy - ∑x∑y

n∑x2 – (∑x)2 n∑y2 – (∑y)2

Calculate the numerator:


n∑ty - ∑t∑y = (10 x 61,187) – (55.00 x 10,670) = 25,020.00

Calculate the denominator


n∑x2 – (∑x)2 n∑y2 – (∑y)2 = (10 x 385) – (55.0)2 x (10 x 11,463,306) –
(10,670) = 25,434.86
r = 25,020 / 25,434.86 = 0. 984

Interpretation of result: There is a 98.4% increase of enrollment on the next fall.

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Forecasting

P4. The table below contains data on the monthly amount, in millions of dollars, which was spent by
"leading national advertisers" for advertising apparel and accessories in magazines, in four recent
years.
Year
Month 1 2 3 4
January $6.7 $7.9 $ 8.8 $ 7.4
February 6.2 8.4 10.3 17.4
March 12.1 15.1 20.4 26.1
April 14.4 15.9 17.3 26.6
May 11.1 11.8 15.7 17.0
June 7.4 5.5 9.0 10.4
July 6.4 7.6 8.9 7.9
August 12.9 13.0 20.0 24.7
September 21.1 23.2 32.6 35.6
October 15.4 17.2 24.2 24.8
November 16.5 16.7 22.0 22.2
December 11.6 11.9 16.9 19.8
Source: Survey of Current Business, U.S. Department of Commerce, Washington, D.C., various dates.
P5. Use the data in Problem P4 to create the following two naïve forecasts:
a. Use the actual value in the previous period to forecast the amount which will be spent on
advertising apparel and accessories in January of Year 5.
The actual spent in January of Year 5 is 19.8 using naïve forecasting the actual spent on
last December of year value. (See attached Excel for reference)

b. Use the actual value in the same month of the previous year to forecast the amount which will
be spent on advertising apparel and accessories for January of Year 5.
The actual spent for January of Year 5 is 19.8 using naïve forecasting the actual spent on
last December of year value. (See attached Excel for reference)

P6. Use the data for Problem P4 to complete the following:


a. Construct the worksheet for single-factor exponential smoothing with   0.20 to obtain
the forecasts for the months of February through December of Year 1. Assume that the
forecast for January of Year 1 is the same as the actual for January of Year 1.

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CYNTHIA M. FERRER
MSEM
Forecasting

Ft = Ժ (At - 1) + (1 - Ժ ) Ft-1

Ժ = 0.20
Initial Forecast = 6.7

b. Draw the graph of the actual values and the forecasted values.

The comparison data between actual and forecast values at in smooth curve lines, but there
are increase of actual values versus forecast values to month of April and September. There is
a drop of actual values from the line of forecast values to month of June to July.

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Forecasting

TIPS FOR SOLVING PROBLEMS


1. Stay focused on which period you are forecasting, and thus which past data you should use. Most
time series techniques consist of relatively simple formulas, but a disadvantage of this is that people often
answer a question incorrectly by obtaining the answer to a different question correctly. The two parts of
Problem P1 provide a good example of this: some people may calculate an answer to Part a, and obtain
$22.18 as the forecast for the 10th period. This is incorrect, because $22.18 is obtained by averaging
together periods 6 through 10- this makes it the forecast for period 11, or the answer to Part b. People
who mistakenly indicate $22.18 as the answer to Part a, the 5-month moving average forecast for period
10, are including the actual from period 10 in the calculation of the forecast for period 10. This, by
definition of the formula, is not “allowed”, but this type of “misalignment” is common when practicing
these techniques.

2. Remember: Error is actual minus forecast. Forecast error is a standard formula and a simple one:
simply remember that error is the actual observed in a period minus the forecast for the same period. If
you scan your work for Problem P6, you may see why this formula is somewhat “counter-intuitive”, and
thus there is the danger of confusion if you do not stay focused. Notice that, when a forecast is too high
compared to its corresponding actual, such as during July in Problem P6, the error associated with that
forecast is negative. When the forecast too low, such as in September, the error is positive. Because a
forecast that is too high in hindsight implies optimism and surplus, and a forecast revealed as too low
suggests there was a shortage, people sometimes accidentally associate the opposite signs to the forecast
errors. However, this simply isn’t true: error is actual minus forecast.

3. Tips for “Real Life” forecasting. Test problems and end-of-chapter problems are usually specific in
terms of which technique you should employ. However, in “real life”, how should you determine which
time series technique would be appropriate for your forecasting? Begin by plotting your past data, and
studying it. Does the plot reveal a trend? If so, either a trend line or trend-adjusted exponential
smoothing should be used. A linear trend line requires less effort than trend-adjusted smoothing. If no
trend is present, select one of the averaging techniques, such as moving average or exponential
smoothing. Whether trend or averaging is used, you may also want to consider whether seasonal
variations are a factor. Again, examine the plot to determine if major ups and downs occur periodically.
Note that when annual data are plotted, seasonality cannot be discerned because these values have been
aggregated into annual amounts, thereby concealing any possible seasonal variation.

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