Chapter 4 Forecasting

True/False

1) A naïve forecast for September sales of a product would be equal to the forecast for August.
Answer: FALSE
Diff: 2
Topic: Time-series forecasting
Objective: LO4-3

2) The forecasting time horizon and the forecasting techniques used tend to vary over the life
cycle of a product.
Answer: TRUE
Diff: 2
Topic: What is forecasting?
Objective: LO4-1

3) Demand (sales) forecasts serve as inputs to financial, marketing, and personnel planning.
Answer: TRUE
Diff: 2
Topic: Types of forecasts
Objective: LO4-1

4) Forecasts of individual products tend to be more accurate than forecasts of product families.
Answer: FALSE
Diff: 2
Topic: Seven steps in the forecasting system
Objective: LO4-1

5) Most forecasting techniques assume that there is some underlying stability in the system.
Answer: TRUE
Diff: 2
Topic: Seven steps in the forecasting system
Objective: LO4-1

6) The sales force composite forecasting method relies on salespersons' estimates of expected
sales.
Answer: TRUE
Diff: 1
Topic: Forecasting approaches
Objective: LO4-2

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7) A time-series model uses a series of past data points to make the forecast.
Answer: TRUE
Diff: 2
Topic: Forecasting approaches
Objective: LO4-2

8) The quarterly "make meeting" of Lexus dealers is an example of a sales force composite
forecast.
Answer: TRUE
Diff: 1
Topic: Forecasting approaches
Objective: LO4-2

9) Cycles and random variations are both components of time series.

Answer: TRUE
Diff: 1
Topic: Time-series forecasting
Objective: LO4-3

10) A naive forecast for September sales of a product would be equal to the sales in August.
Answer: TRUE
Diff: 1
Topic: Time-series forecasting
Objective: LO4-3

11) One advantage of exponential smoothing is the limited amount of record keeping involved.
Answer: TRUE
Diff: 2
Topic: Time-series forecasting
Objective: LO4-3

12) The larger the number of periods in the simple moving average forecasting method, the
greater the method's responsiveness to changes in demand.
Answer: FALSE
Diff: 2
Topic: Time-series forecasting
Objective: LO4-3

13) Mean Squared Error and Coefficient of Correlation are two measures of the overall error of a
forecasting model.
Answer: FALSE
Diff: 1
Topic: Time-series forecasting
Objective: LO4-4

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14) In trend projection, the trend component is the slope of the regression equation.
Answer: TRUE
Diff: 1
Topic: Time-series forecasting
Objective: LO4-3

15) In trend projection, a negative regression slope is mathematically impossible.

Answer: FALSE
Diff: 2
Topic: Time-series forecasting
Objective: LO4-3

16) Seasonal indices adjust raw data for patterns that repeat at regular time intervals.
Answer: TRUE
Diff: 2
Topic: Time-series forecasting
Objective: LO4-5

17) Patterns in the data that occur every several years are called circuits.
Answer: FALSE
Diff: 1
Topic: Time-series forecasting
Objective: no LO

18) Linear-regression analysis is a straight-line mathematical model to describe the functional

relationships between independent and dependent variables.
Answer: TRUE
Diff: 1
Topic: Associative forecasting methods: Regression and correlation analysis
Objective: LO4-6

19) The larger the standard error of the estimate, the more accurate the forecasting model.
Answer: FALSE
Diff: 1
Topic: Associative forecasting methods: Regression and correlation analysis
Objective: LO4-4

20) A trend projection equation with a slope of 0.78 means that there is a 0.78 unit rise in Y for
every unit of time that passes.
Answer: TRUE
Diff: 2
Topic: Time-series forecasting: Trend projections
Objective: LO4-6

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48) Computer monitoring of tracking signals and self-adjustment if a signal passes a preset limit
is characteristic of
A) exponential smoothing including trend
B) adaptive smoothing
C) trend projection
D) focus forecasting
E) multiple regression analysis
Answer: B
Diff: 2
Topic: Monitoring and controlling forecasts
Objective: LO4-7

49) Many services maintain records of sales noting

A) the day of the week
B) unusual events
C) weather
D) holidays
E) all of the above
Answer: E
Diff: 2
Topic: Forecasting in the service sector
Objective: LO4-2

50) Taco Bell's unique employee scheduling practices are partly the result of using
A) point-of-sale computers to track food sales in 15 minute intervals
B) focus forecasting
C) a six-week moving average forecasting technique
D) multiple regression
E) A and C are both correct.
Answer: E
Diff: 2
Topic: Forecasting in the service sector
Objective: LO4-3

51) Which of the following most requires long-range forecasting (as opposed to short-range or
medium-range forecasting) for its planning purposes?
A) job scheduling
B) production levels
C) cash budgeting
D) capital expenditures
E) purchasing
Answer: D
Diff: 2
Topic: Forecasting time horizons
Objective: LO4-1

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52) Suppose that demand in period 1 was 7 units and the demand in period 2 was 9 units.
Assume that the forecast for period 1 was for 5 units. If the firm uses exponential smoothing with
an alpha value of .20, what should be the forecast for period 3? (Round answers to two decimal
places.)
A) 9.00
B) 3.72
C) 9.48
D) 5.00
E) 6.12
Answer: E
Diff: 2
Topic: Time-series forecasting
Objective: LO4-3

53) __________ expresses the error as a percent of the actual values, undistorted by a single
large value.
A) MAD
B) MSE
C) MAPE
D) FIT
E) The smoothing constant
Answer: C
Diff: 2
Topic: Measuring forecast error
Objective: LO4-4

54) If Brandon Edward were working to develop a forecast using a moving averages approach,
but he noticed a detectable trend in the historical data, he should
A) use weights to place more emphasis on recent data
B) use weights to minimize the importance of the trend
C) change to a naïve approach
D) use a simple moving average
E) change to a qualitative approach
Answer: A
Diff: 2
Topic: Moving averages
Objective: LO4-3

Short Answer

1) __________ forecasts are concerned with rates of technological progress, which can result in
the birth of exciting new products, requiring new plants and equipment.
Answer: Technological
Diff: 1
Topic: Types of forecasts
Objective: LO4-1

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19) Arnold Tofu owns and operates a chain of 12 vegetable protein "hamburger" restaurants in
northern Louisiana. Sales figures and profits for the stores are in the table below. Sales are given
in millions of dollars; profits are in hundreds of thousands of dollars. Calculate a regression line
for the data. What is your forecast of profit for a store with sales of $24 million? $30 million?

Store Profits Sales

1 14 6
2 11 3
3 15 5
4 16 5
5 24 15
6 28 18
7 22 17
8 21 12
9 26 15
10 43 20
11 34 14
12 9 5

Answer: Students must recognize that "sales" is the independent variable and profits is
dependent. Store number is not a variable, and the problem is not a time series. The regression
equation is Y = 5.936 + 1.421 X (Y = profit, X = sales). A store with $24 million in sales is
estimated to profit 40.04 or $4,004,000; $30 million in sales should yield 48.566 or $4,856,600
in profit.
Diff: 2
Topic: Associative forecasting methods: Regression and correlation analysis
Objective: LO4-6

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20) The department manager using a combination of methods has forecast sales of toasters at a
local department store. Calculate the MAD for the manager's forecast. Compare the manager's
forecast against a naive forecast. Which is better?

Manager's
Month Unit Sales Forecast
January 52
February 61
March 73
April 79
May 66
June 51
July 47 50
August 44 55
September 30 52
October 55 42
November 74 60
December 125 75

Answer:
Month Actual Manager's Abs. Error Naive Abs. Error
January 52
February 61
March 73
April 79
May 66
June 51
July 47 50 3 51 4
August 44 55 11 47 3
September 30 52 22 44 14
October 55 42 13 30 25
November 74 60 14 55 19
December 125 75 50 74 51

The manager's forecast has a MAD of 18.83, while the naive is 19.33. Therefore, the manager's
forecast is slightly better than the naive.
Diff: 2
Topic: Monitoring and controlling forecasts
AACSB: Analytic Skills
Objective: LO4-4

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21) The last seven weeks of demand at a new car dealer are shown below. Use a three-period
weighted-moving average to determine a forecast for the 8th week using weights of 1, 2, and 3.
Calculate the MAD for this forecast. What does the MAD indicate?

Week Sales
1 25
2 30
3 27
4 31
5 27
6 29
7 30
Answer:
Week Sales 3WMA |error|
1 25
2 30
3 27
4 31 28 3
5 27 30 3
6 29 28 1
7 30 29 1
8 29

MAD = 8/4 = 2
An MAD of 2 means that the forecasting technique used was typically off by 2 units each period.
Diff: 2
Topic: Time-series forecasting, moving averages, and measuring forecast error
Objective: LO4-4

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