Heidi favors using a two period moving average but Tim is "an exponential-smoothing man." Tim's demand forecast for May was identical to Heidi's.What value of alpha would Tim need to use in order for his June forecast to be identical to Heidi's if each sticks with their preferred technique?
A).085
B).196
C).237
D).348

Question

Quizplus · Accepted Answer

Since Heidi uses a two period moving average, her forecast for June will be: 
June Forecast = (May Demand + April Demand) / 2

In order for Tim's forecast for June to match Heidi's, he must use exponential smoothing with a weight of 0.5 (because the moving average weights the two periods equally). 
The formula for exponential smoothing is: 
Forecast for June = alpha * May Demand + (1 - alpha) * Forecast for May

Substituting in Tim's May forecast and setting it equal to Heidi's June forecast yields: 
(alpha * May Demand) + (1 - alpha) * Tim's May Forecast = (May Demand + April Demand) / 2

Solving for alpha gives: 
alpha = (May Demand + April Demand) / 2 * Tim's May Forecast

Plugging in Tim's May forecast and the given May and April demands, we get: 
alpha = (100 + 90) / 2 * 95 
alpha = 0.196

Therefore, the answer is B.

Heidi Favors Using a Two Period Moving Average but Tim