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DEMAND FORECASTINGMEANING Demand forecasting is scientific and analytical estimation of demand for products or services for a particular period of time.

It is a process of determining how much of what products is needed when and where.Process of Forecasting Identification of objective

Determining the nature of goods under consideration

Selecting a proper method of forecasting

Interpretation of resultsMethods of ForecastingThere are two types of Demand Forecasting.

Opinion Polling Methods

Statistical MethodsOpinion Polling MethodConsumers Survey Method In this method consumers are contacted personally to disclose their future purchase plans. This may be attempted with the help of either a complete survey of all consumers, or by selecting a few consuming units out of the relevant population(called sample survey). Consumers survey can be done by two ways. These are as follows:- Complete Enumeration Method Sample Survey Method

Sales force opinion MethodThe men who are closest to the market(viz., salesman) are questioned and their responses(reactions) are aggregated.

It has the advantage that it is based on the first hand knowledge of the salesman. This method generally proves quite useful for forecasting demand for new products and is also known as reaction survey method.

Experts Opinion MethodA group of specialists outside the firm are questioned and their responses(reactions) are obtained. This method is also known as Delphi Method.

This method is used where basic data are lacking and experts may give divergent views. This is best suited in situations where intractable changes are occurring eg., forecasting future technological states.Statistical Method Trend Projection Method

Barometric MethodTrend Projection Method Fitting a trend line by observation

Trend through least squares methodFitting a trend line through ObservationsThis method of forecasting trend is elementary, easy and quick. It involves merely the plotting of actual sales data on a chart and then estimating demand just by observation where the trend line lies. This line can be extended towards a future period and the corresponding sales forecast read from the graph.YEARSALES {IN THOUSANDS}200140200246200343200446200550200654200751200857200955201060Least Square MethodYEARPRODUCTION (Y)04800059000692007830089400999010920This method uses the mathematical formulae to find the demand. And this can be understood with the help of a example.Least Square methodThe equation of least square line Yc=a+bXa=y / N , b=xy / x2 Normal Equation for a Y=na+b XA=900, B=20 Normal Equation for bXY=a X+b (X*X)Yc= 900 + 20(4) = 980 (year 2011)YEARPRODUCTION (Y)xx2xyYc04800-39-240084005900-24-180086006920-11-9208800783000 -90008940119409200999024198094010920392760960Y = 6300x= 0x2 = 28xy = 56014Barometric MethodThere is a difference between Trend Projection Method and barometric method. The former implies that the future is some sort of extension of the past while the latter is based on the ideas that the future can be predicted from certain events occurring in the present. Formally barometric techniques when combined in certain ways provide indications of the direction of change in the economy or specific industries. These are, therefore, as the barometers of a market change.BREAKEVEN POINT AND MARGIN OF SAFTEYMARGINAL COST :- The cost of producing of an additional unit.

MARGINAL COSTING:- Marginal costing is decision making technique which base on concept of variablity .

BASIC MARGINAL COST EQUATION

S V = F + PBREAK EVEN POINTIt is that level of activity at which the company earns nothing ( NO PROFIT NO LOSS). It is that point beyond which the profit starts running . TC = TR

FORMULABEP = FIXED COST / P. V RATIO ( BEP IN RS)

BEP = FIXED COST / CONTRIBUTION PER UNIT (BEP IN UNIT)WHAT IS P.V RATIO ?P.V Ratio the meaning of profit stand for contribution and volume stands for amount of sales . P.V Ratio is the measure of operational efficiency of the business enterprises and indirectly it can be assumed that higher the efficiency pave the way for higher profitability for business enterprises.

FORMULAP.V RATIO = Contribution/Sales (rs) * 100

P.V RATIO = change in profit / change in sale (rs) * 100WHAT IS CONTRIBUTION ?Contribution is the excess of sales over variable cost which contributes toward the fixed cost & profitability .

FORMULA

CONTRIBUTION = Sale Variable cost

CONTRIBUTION = Profit + Fixed costMARGIN OF SAFETY

Margin of safety is the excess of sale over B.E.P sale .

FORMULAMARGIN OF SAFETY = SALE BEP SALES or PROFIT/ P.V RATIO

MARGIN OF SAFTEY( in units) = Profit/ Contribution per unit

Rockstar ltd. Maintains a margin of saftey of 37.5% with an overall contribution to sales ratio of 40% Its fixed costs amount to Rs. 5 LakhsCalculate the following:Break-even salesTotal salesTotal Variable costs Current Profit New margin of saftey if the sales value is increased by 7.5%Problem:-Break-even sales = Fixed Cost . Cont./Sales = 5 lakhs = 12.50 lakhs 40%Total sales = Break even sales + Margin of saftey = Break even sales + 37.5/100 * Sales or, 12.50 lakhs = 62.5/100 Sales or sales = 12.50 lakhs * 100 = 20 lakhs 62.5Total variable cost = 60% of Rs. 20 lakhs = 12 lakhs.4. Current profit = Sales -(Variable cost + Fixed cost) = 20 lakhs (12 lakhs + 5 lakhs) = 20 lakhs 17 lakhs = 3 lakhs5.New margin of saftey if the sales value is increased by 7.5%New sales Value = Rs. 20 lakhs + 7.5% = 21.50 lakhsHence, new margin of saftey = New sales Break-even sales = 21.5 lakhs 12.50 lakhs = Rs. 9 lakhsProblem:- Ra-One Ltd. Fixed costs of Rs. 2.00.000. It has two products, that it can sell ; A & B. The Co. sells these products at a rate of 2 units of A to 1 unit of B. The unit contribution is Re. 1 per unit for A & 2 per unit for B. How many units of A & B would be at the break-even point.

Solution-Products A B TotalSales unit be 2 1 3 units(In the ratio 2 : 1)Contribution per unit Rs.1 Rs.2Solution- Products A B Total Sales unit be 2 1 3 units (In the ratio 2 : 1) Contribution per unit Rs.1 Rs.2 Total Contribution Rs.2 Rs.2 Rs.4 Hence, Contribution per unit (composite) = 4/3 Total Fixed Cost = Rs.2,00,000

BEP (Composite) = Fixed Cost . Contribution per unit = 2,00,000 4/3

Or BEP in units = 2,00,000 * 3 4 = 1,50,000 units 2/3 A = 1,00,000 units

1/3 A = 50,000 units