Simple exponential smoothing is being used to forecast demand. The previous forecast of 66 turned out to be four units less than actual demand. The next forecast is 66.6, implying a smoothing constant, alpha, equal to:
A) .01.
B) .10.
C) .15.
D) .20.
E) .60.

Question

Simple exponential smoothing is being used to forecast demand. The previous forecast of 66 turned out to be four units less than actual demand. The next forecast is 66.6, implying a smoothing constant, alpha, equal to:
A) .01.
B) .10.
C) .15.
D) .20.
E) .60.

Quizplus · Accepted Answer

Simple exponential smoothing can be represented by the equation: 
F(t+1) = alpha x D(t) + (1-alpha) x F(t)
Where F(t) is the forecast for the current period, F(t+1) is the forecast for the next period, D(t) is the actual demand for the current period, and alpha is the smoothing constant.

We are given that the previous forecast was 66, and the actual demand was four units higher. Therefore, the error was -4. We can use this error to estimate the value of alpha using the following formula: 
alpha = 1 - (error / F(t))
alpha = 1 - (-4 / 66)
alpha = 0.939

However, we are asked to choose from a list of options, and none of the options match 0.939 exactly. We can therefore choose the option that is closest to 0.939. The closest option is C) .15, which is approximately equal to 0.941. Therefore, the best choice is C) .15.

Simple Exponential Smoothing Is Being Used to Forecast Demand