Question

Lenovo uses the ZX-81 chip in some of its laptop computers. The prices for the chip during the last 4 months were as follows: 

Month	Price Per Chip
January	$1.80
February	$1.66
March	$1.61
April	$1.93

This exercise contains only parts a, b, and c. 

a) Using a 2-month moving average, calculate the forecast for March and April (round your responses to two decimal places). 

b) Using a 3-month moving average, calculate the forecast for April. 

 c) Calculate the mean absolute deviation based on a 2-month average.

Answer 1

a) A two period moving average method averages the actual value for the previous two periods to generate the forecast for the next period. This can be calculated using the following formula : Sum of the actual value for the previous two periods /2

so using the above formula the forecast for

• March = (1.80+1.66)/2 = 3.46/2 = 1.73
• April = (1.66+1.61)/2 = 3.27/2 = 1.64

b)) A three period moving average method averages the actual value for the previous three periods to generate the forecast for the next period. This can be calculated using the following formula : Sum of the actual value for the previous three periods /3

so using the above formula the forecast for April = (1.80+1.66+1.61)/3 = 5.07/3 = 1.69

c) Mean Absolute Deviation = Sum of absolute deviation for all the periods / number of periods

Where absolute deviation = absolute value of deviation

Deviation = actual value - forecasted value

Using the above formula the deviation and absolute deviation with a two period moving average method for March and April are

• For March deviation = 1.61-1.73 = -0.12 and absolute deviation = 0.12
• For April deviation = 1.93-1.64 = 0.29 and absolute deviation = 0.29

Mean Absolute Deviation = (0.12+0.29)/2 = 0.41/2 = 0.205

For the three months moving average method the deviation for April = 1.93-1.69 = 0.24 and absolute deviation = 0.24

Mean Absolute Deviation for three months moving average method = 0.24/1 = 0.240

Based on the mean Absolute Deviation the two months moving average method has performed better as it has a lower mean Absolute Deviation than the three months moving average method.