BA 490C Incremental Adjustment Forecasting Work Session1 Sales Forecasting – Chapter 6 The “Incremental Adjustment” Model Future Sales = Previous Sales + Incremental Sales

BA 490C Incremental Adjustment Forecasting Work Session2 Incremental Adjustment Forecasting Model Future Sales = Previous Sales + Incremental Sales Incremental Sales = f(RGDP, seasonal factors, marketing factor 1 (e.g., price)…marketing factor n Process: 1. Previous sales are actual sales from previous quarter (see Quarterly Industry report). 2. For Incremental Sales = (see following slides). 3. Sum impact of all factors and add to Previous Sales to obtain Future Sales

BA 490C Incremental Adjustment Forecasting Work Session3 Sales Forecasting – Chapter 6 Calculating “Incremental Sales” Changes in RGDP – This is equivalent to an “income effect”. The “income elasticity” is approx. 2.0 Changes in Price – Follows the “Law of Demand” with price elasticity of approx. –2. This price elasticity will change with quality/features. Changes in Advertising – Advertising expenditures “elasticity” is approx. 0.2, e.g., a 10% increase in advertising spending will result in approx. 2% increase in unit sales. This “elasticity” is reliable for spending changes of +/- 15%. Changes (+) in sales persons, sales salaries & commissions – each has a positive impact, but you will have to develop estimates of these impacts as the competition evolves.

BA 490C Incremental Adjustment Forecasting Work Session4 Calculate expected change in RGDP Information to calculate the expected change is shown on Quarterly History Report. For example, for Y3Q1 In Merica: % change = ( )/100 = -1.67% In Sereno: % change = ( )/100 = 5.15%

BA 490C Incremental Adjustment Forecasting Work Session5 Sales increments due to RGDP change in Y3Q1 In Merica and Sereno (% change in RGDP) x 2 = % change in unit sales Assume the effect on your durable product’s sales will be twice the change in the RGDP For your Merica home area: (1.67%) x 2 = -3.34% change in unit sales Incremental change = X 112 = rounded to nearest whole number = -4 For Merica non home areas: Incremental change = X 106 = rounded to nearest whole number = -4 For Sereno: (5.15%) x 2 = 10.3% change in unit sales Incremental change =.103 X 56 = 5.78 rounded to nearest whole number = 6

BA 490C Incremental Adjustment Forecasting Work Session6 Calculate expected impact of seasonal factor From Chapter 6, page 105, the % change from: Quarter 4 to Quarter 1 = -21% Quarter 1 to Quarter 2 = +10% Quarter 2 to Quarter 3 = -10% Quarter 3 to Quarter 4 = +27% % change = (Present Quarter Index – Previous Quarter Index)/Previous Quarter Index

BA 490C Incremental Adjustment Forecasting Work Session7 Seasonal impact calculation For Merica home area: (-21%) x 112 = rounded to - 24 For Merica non home areas: (-21%) x 106 = rounded to - 22 For Sereno: (-21%) x 56 = rounded to - 12

BA 490C Incremental Adjustment Forecasting Work Session8 Price changes Assume price elasticity = -2.0 For every 1% change in price, there will be a 2% change in unit sales in the opposite direction (the law of demand) For example, if price is raised by 5%, then unit sales would decrease by 10%.

BA 490C Incremental Adjustment Forecasting Work Session9 Price change impact for Y3Q1 Example assumes a price increase of 5% For Merica home area: (5%) x – 2 = - 10% change in unit sales (-.10) x 107 = rounded to – 11 For Merica non home areas: (5%) x – 2 = - 10% change in unit sales (-.10) x 106 = rounded to – 11 For Sereno area: (5%) x – 2 = - 10% change in unit sales (-.10) x 56 = rounded to – 6

BA 490C Incremental Adjustment Forecasting Work Session10 Advertising changes Assume advertising elasticity = 0.2 For every 1% change in advertising expenditures, there will be a.2% change in unit sales in the same direction For example, if advertising expenditures are raised by 10%, then unit sales would increase by 2%.

BA 490C Incremental Adjustment Forecasting Work Session11 Advertising change impact Example assumes 10% increase in advertising. For Merica home area: (10%) x (0.5) = 5% increase in unit sales (0.05) x 107 = 5.35 rounded to 5 For non Merica home areas: (10%) x (0.5) = 2% increase in unit sales (0.05) x 106 = 5.3 rounded to 2 For Sereno: (10%) x (0.5) = 5% increase in unit sales (0.05) x 56 = 2.8 rounded to 3

BA 490C Incremental Adjustment Forecasting Work Session12 Other changes to consider Sales Salary Sales Commission Number of Salespersons New Model Introduction Competitors’ actions

BA 490C Incremental Adjustment Forecasting Work Session13 For New Model Introduction & Competitors’ actions New Model introduction results in, on average, about a 15% increase in unit sales Competitor actions can cause either increases or decreases If a competitor cuts prices dramatically, your unit sales will decrease. If a competitor stocks out your unit sales will increase.