MARKET ANALYSIS

Question. 1.
a. The sales of Diesel Generating sets for M/S Bright Generators Ltd. are given in the
following table for the last 12 years. The figures are in thousand numbers.

YEAR SALES YEAR SALES

1995 2000 2001 3200
1996 2200 2002 3500
1997 2100 2003 4000
1998 2300 2004 3500
1999 2500 2005 4500
2000 3000 2006 5000

Use the least square regression analysis to forecast the sales of generating sets for the
years 2007 and 2008.

b. For the above data assume that the forecast for the year 1995 was 2100. If the
smoothing factor is 0.4 project the forecasts for the years 1996 to 2006 using exponential
smoothing method.

c. Using Simple Moving Average of three years, project the sales of Generating sets for
the years 1998 to 2006 for the above example.

Question 2.

The actual sales figures of air conditioners manufactured by M/S Cool Safe Ltd. are
given for the past 10 years in the following Table. The sales figures are in thousand
numbers. As a marketing Consultant for the company, you have to forecast the sales for
the year 1911 using two years and three years simple moving average method.

YR ACTUAL YR ACTUAL
SALES SALES
1901 230 1906 260
1902 220 1907 300
1903 200 1908 240
1904 240 1909 280
1905 230 1910 320

Which of these forecasts would be more reliable based on “Mean Squared Error” basis?
SOLUTION 1:

We have to estimate the parameters a and b in the linear relationship

Yt = a + bT

using the least squares method.

According to the least squares method the parameters would be:

∑TY–nTY
b=
∑T2–nT2

a= Y – bT

The parameters are calculated as follows:

T Y TY T2
1 (1995) 2,000 2,000 1
2 2,200 4,400 4
3 2,100 6,300 9
4 2,300 9,200 16
5 2,500 12,500 25
6 3,000 18,000 36
7 3,200 22,400 49
8 3,500 28,000 64
9 4,000 36,000 81
10 3,500 35,000 100
11 4,500 49,500 121
12 (2006) 5,000 60,000 144

∑ T = 73 ∑ Y = 37,800 ∑ TY = 283,300 ∑ T 2 = 650

T = 6.08 Y = 3,150

∑TY–nTY 283,300 – 12 x 6.08 x 3,150

b= =
∑T2–nT2 650 – 12 x 6.08 x 6.08

53506
= = 259.23
206.4

a = Y – bT
= 3,150 – 259.23 (6.08) = 1756.12
Thus linear regression will be

Y = 1756.12 + 259.23 T

Hence the forecast for the year 2007 (13th year) will be

= 1756.12 + 259.23 X 13 = 5126.11 or say 5126

Since the numbers are in thousands, the sales forecast for the year 2007 will be
5,126,000 Generating sets.

Similarly, the forecast for the year 2008 (14th year) will be

= 1756.12 + 259.23 X 14 = 5385.34 or say 5385

Since the numbers are in thousands, the sales forecast for the year 2008 will be
5,385,000 Generating sets.

b. In general, in exponential smoothing method, the forecast for t + 1 is

Ft + 1 = Ft + α et
Where Ft + 1 = forecast for year ) α = smoothing factor
et = error in the forecast for year t = St = Ft
F1 is given to be 2100 and α is given to be 0.4

The forecasts for periods 2 (1996) to 12 (2006) can be then calculated as follows:

Period Data (St) Forecast Error Forecast for t + 1

t (Ft) (St -Ft) (Ft + 1 = Ft + α et)

1 2,000 2100.0 -100 F2 = 2100 + 0.4 (-100) = 2060

2 2,200 2060 140 F3 = 2060 + 0.4(140) = 2116
(1996)
3 2,100 2116 -16 F4 = 2116 + 0.4 (-16) = 2052
4 2,300 2052 248 F5 = 2052 + 0.4(248) = 2151.2
5 2,500 2151.2 348.8 F6 = 2151.2 + 0.4(348.8) = 2290.72
6 3,000 2290.72 709.28 F7 = 2290.72 + 0.4(709.28) = 2574.43
7 3,200 2574.43 625.57 F8 = 2574.43 + 0.4(625.57) = 2797.66
8 3,500 2824.66 675.34 F9 = 2824.66 + 0.4(675.34) = 3094.80
9 4,000 3094.8 905.2 F10 = 3094.8 + 0.4(905.2) = 3456.9
10 3,500 3456.9 143.1 F11 = 3456.9 + 0.4(143.1) = 3514.1
11 4,000 3514.1 485.9 F12 = 3514.1 + 0.4(485.9) = 3708.5
12 4,500 3708.5 291.5 F13 = 3708.5 + 0.4(291.5) = 3825.1
(2006)

C. According to the simple moving average method

 St + S t – 1 +…+ S t – n +1
Ft + 1 =
n
where Ft + 1 = forecast for the next period
St = sales for the current period
n = period over which averaging is done

Given n = 3, the forecasts for the period 4 to 14 can be calculated as follows:

Period Data (St) Forecast Forecast for t + 1

t (Ft) Ft + 1 = (St+ S t – 1 + S t – 2)/ 3

1 2,000
2 2,200
3 2,100
4 2,300
5 2,500
6 3,000
7 3,200
8 3,500
9 4,000
10 3500
11 4500
12 5,000
13 - 4333
F4 = (2000 + 2200 + 2100)/3 = 2100
2100 F5 =(2200 + 2100 + 2300)/3= 2200
2200 F6 = (2100 + 2300 + 2500)/3 = 2300
2300 F7 = (2300 + 2500 + 3000)/3= 2600
2600 F8 = (2500 + 3000 + 3200)/3 = 2900
2900 F9 = (3000 + 3200 + 3500)/3 = 3233
3233 F10 = (3200 + 3500 + 4000)/3 = 3567
3567 F11 = (3500 + 4000 + 3500)/3 =3667
3667 F12 =(4000 + 3500 + 4500)/3 = 4000
4000 F13 = (3500 + 4500 + 5000)/3 = 4333
SOLUTION 2.

YR ACTUAL 2 YRS ERROR ERROR 3 YRS ERROR ERROR

SALES M.A. (Act – For) SQUARE M.A. (Act – For) SQUARE
1 230 ------- ------- ------- ------- ------- -------
2 220 ------- ------- ------- ------- ------- -------
3 200 225 -25 625 ------- ------- -------
4 240 210 30 90 216.7 23.3 542.89
5 230 220 10 100 220 10 100
6 260 235 25 625 223.3 26.7 712.89
7 300 245 55 3025 243.3 56.7 3214.89
8 240 230 10 100 263.3 -23.3 542.89
9 280 270 10 100 266.7 13.3 176.89
10 320 260 40 1600 273.3 46.7 2180.89
11 Forecast 300 6265 280 7471.34
M.S.E. 783.125 1067.32

Answers:

1) Forecast of sales in the year 1911 based on 2 years moving average = 300,000
2) Forecast of sales in the year 1911 based on 3 years moving average = 280,000
3) Mean Squared Error being less for the two year moving average, forecast with two
year moving average is more reliable.
(Note: Marks could be deducted if the units are not mentioned in the answer )