Sales of hair dryers at the Walgreens stores in Youngstown, Ohio, over the past 4 months have been 100, 110, 120, and 130 units (with 130 being the most recent sales).
Develop a moving-average forecast for next month, using these three techniques:
a) 3-month moving average.
b) 4-month moving average.
c) Weighted 4-month moving average with the most recent month weighted 4, the preceding month 3, then 2, and the oldest month weighted 1.
d) If next month’s sales turn out to be 140 units, forecast the following month’s sales (months) using a 4-month moving average.
The correct answer and explanation is :
Here are the moving average forecasts:
a) 3-month Moving Average Forecast: ( \frac{110 + 120 + 130}{3} = 120.0 )
b) 4-month Moving Average Forecast: ( \frac{100 + 110 + 120 + 130}{4} = 115.0 )
c) Weighted 4-month Moving Average Forecast:
Using weights (1, 2, 3, 4) for the months from oldest to newest:
[
\frac{(100 \times 1) + (110 \times 2) + (120 \times 3) + (130 \times 4)}{1+2+3+4}
]
[
= \frac{100 + 220 + 360 + 520}{10} = \frac{1200}{10} = 120.0
]
d) Forecast for the Following Month (if next month’s sales are 140):
Updating the 4-month data: ([110, 120, 130, 140])
[
\frac{110 + 120 + 130 + 140}{4} = 125.0
]
Explanation:
The moving average methods help smooth out short-term fluctuations in sales data to make future predictions.
- The 3-month moving average is based on the most recent three months, giving an updated forecast of 120 units. It is useful for short-term trends.
- The 4-month moving average considers a longer period and provides a slightly lower estimate of 115 units, balancing past fluctuations.
- The weighted 4-month moving average assigns more importance to recent data, resulting in a forecast of 120 units, which aligns closely with the 3-month moving average.
- If next month’s sales are 140 units, the updated 4-month moving average forecast for the following month increases to 125 units, reflecting the upward trend.
By applying different forecasting techniques, businesses can make more informed decisions on inventory management, supply chain planning, and sales strategies.