Below you will find product demand for the past five years for XYZ company. Using two-year average and trend analysis, identify which method is the most appropriate and make a forecast for year six. What would your forecast be? Why?
Year Demand ( in 1000s )
1 13
2 17
3 18
4 21
5 27
To determine the most appropriate method of forecasting and make a forecast for year six, let's first analyze the two-year average and trend analysis methods.
The two-year average method calculates the average demand over the past two years. In this case, we would calculate the average of the demands in year 4 and year 5:
Average demand = (21 + 27) / 2 = 24
This method assumes that demand will remain relatively stable and consistent, so the forecast for year six would be 24 (in 1000s).
On the other hand, trend analysis evaluates the historical data to identify any patterns or trends in the demand. It involves fitting a trend line to the data and then projecting it into the future. To do this, we can use linear regression to fit a straight line to the year-demand data:
Year | Demand
1 | 13
2 | 17
3 | 18
4 | 21
5 | 27
By using linear regression, we can find the equation of the line that best fits the data. In this case, the equation is:
Demand = 3.75 * Year + 7.25
Using this equation, we can forecast the demand for year six by substituting the value of 6 for Year:
Demand = 3.75 * 6 + 7.25 = 29
Therefore, the forecast for year six using trend analysis would be 29 (in 1000s).
Now, to determine the most appropriate method, we need to consider a few factors. If demand has been relatively stable in the past and there is no clear trend, the two-year average method would be more appropriate. On the other hand, if there is a noticeable trend in the data, trend analysis would provide a more accurate forecast. In this case, since there is a clear increasing trend in the demand over the years, trend analysis would be the most appropriate method.
Therefore, the forecast for year six using trend analysis would be 29 (in 1000s).