A toy company buys large quantities of plastic pellets for use in the manufacture of its products. The production manager wants to develop a forecasting system for plastic pellet prices. The price per pound of plastic pellets has varied as shown:
Month Plastic Pellets Price/Pound
1 $0.39
2 $0.41
3 $0.45
4 $0.44
5 $0.40
6 $0.41
7 $0.38
8 $0.36
9 $0.35
10 $0.38
11 $0.39
12 $0.43
13 $0.37
14 $0.38
15 $0.36
16 $0.39
Make a forecast for Month 17 using the moving average, weighted moving average, and exponential smoothing methods as follows:
a) For the moving average, use a 4-period moving average.
b) Use a two-period weighted moving average. Unfortunately, you spilled water on the sheet with the weights to be used for the weight moving average and this blurred the weight for the most recent period. However, you can tell that the weight for the second most recent month is 0.25.
c) For exponential smoothing, using an α = 0.30, and the forecast for Month 5 was $0.41.
d) Using the methods in a) through c), which method provides the better forecast for Month 17? Why? Your selection criteria must be based on the forecasts for Months 12 through 16 using the MAD or MAPE method.