QUESTION 1.

Demand forecasting in an organizations plays a vital role in business

organizations. It provides reasonable data for the organization's capital investment and
expansion decision. Keeping the above statement in consideration. Discuss the various
steps involved in demand forecasting.

ANSWER 1 = Demand forecasting is the process of predicting what the demand for
certain products will be in the future. It identifies what both current and future customers
will want to buy and tells manufacturing facilities what they should actually produce.

The data used to forecast can be historical data or real-time data and should allow you
to make decisions about your future production. This task can be challenging. It is no
secret that demand is driven by customers and that it is constantly changing.
Unexpected external situations, such as the COVID-19 global pandemic, have also
caused tremendous changes in demand for certain products.

However, understanding your demand data will help you avoid over-producing or under-
producing certain products. It is important to understand that your data will only be as
good as you interpret it. This is why many individuals choose to use software with
demand forecasting tools to help them analyze their data and make better predictions.

Here are 5 reasons why demand forecasting is important for your business.

Five Reasons Demand Forecasting is a Must for Your Business

Increasing forecasting accuracy within your business is definitely a worthwhile

investment to many manufacturing operations. Listed below are five reasons demand
forecasting is a must for your business:

1. Customer Satisfaction

As demand is driven by your customers’ needs, the goal of every manufacturing

operation should be to meet their needs. Providing your customers with the product that
they want in a timely manner will increase their satisfaction and make them likely to
purchase from your business again. Demand forecasting is beneficial here as it will
ensure that you have enough inventories to quickly meet the demand.

2. Inventory Optimization
A thorough analysis of the demand for your products can help you identify products that
sell well and others that don’t sell as much. This will help you decide which items you
should keep a higher inventory for to avoid stock-outs and cause customer
dissatisfaction. In addition, demand forecasting will allow you to better plan when to
order items that have a long or varying lead-time to ensure that you always have
enough on hand.

3. Decreased Safety Stock Requirement

Demand forecasting analyzes historical data for trends and seasonal patterns.
Furthermore, it analyzes the overall change of demand related to external factors like
promotion campaigns, price changes, or other external factors. This will allow you to
have a better understanding of when you should keep more items in stock and when
you can keep a lower inventory.

4. Improving Pricing and Promotions

Price changes and promotions represent external factors that can increase the demand
for those goods and services. Demand forecasting that incorporates these factors will
help inventory managers know if they should purchase or produce additional products to
meet an anticipated demand surge. Effective pricing and promotion planning using
What-If scenario analysis can help planners maximize the net revenue of the
organization.

5. Cost Reduction for Expiring Products

Demand forecasting is especially useful for products that have expiry dates, such as in
the food or chemical industries. Without proper demand forecasting, you run the risk of
losing money if you produce too many items and have to sell them at a discounted price
as their expiration date approaches. In addition, unnecessary storage costs are incurred
when you are producing too many products.

Factors Affecting Demand Forecasting

Demand is never constant and fluctuates with the change in certain factors related to
the commodity and the market in which the business operates. With the changing
demand, it’s forecasting also varies.
Following are some of the factors which influence the demand forecasting of a
commodity: Factors Affecting Demand Forecasting

Price of Goods: Demand estimation is highly dependent on the price of goods or

services. The pricing policy and fluctuation in the present price can give an idea of
change in demand for that particular commodity.

Type of Goods: The kind of commodity, its features and usability determines the
customer base it is going to cater. The demand for existing goods can be easily
estimated by following the previous sales trend, competitors’ analysis and substitutes
available. Whereas, the demand for a new product on the market is difficult to predict.

Competition: The level of competition in the market supports the process of demand
forecasting. It is easy to predict sales in a less competitive market, whereas the same
becomes difficult in a market where the new firms can freely enter.

Technology: The demand for any product or service changes drastically with the
advancement in technology. Therefore, it is essential for an organization to be aware of
technological development while forecasting the demand for any commodity.

Economic Perspective: Being updated with economic changes and growth is necessary
for demand forecasting. It assists the organization in preparing for future possibilities
and analyzing the impact of economic development on sales.

Demand forecasting provides reasonable data for the organization’s capital investment
and expansion decision and following steps involved in demand forecasting:-

1) The first step is this process is the identification of the objective. This ensures
how the forecast has to be conducted to ensure the objective can be achieved.
Demand forecasting should have a clear purpose. At its core, it predicts what,
how much, and when customers will purchase. Choose your time period, the
specific product or general category you’re looking at, and whether you’re
forecasting demand for everyone or a specific subset of people.

Make sure it satisfies your financial planners, product marketing, logistics, and
operations teams in a non-biased way.

You need to understand what your goals are for the right demand capacity
planning, which will allow you to use decision-making forecasting processes to
understand online consumer behavior better. The purpose of demand forecasting needs
to be specific before starting the process. The objective can be specified on the
following basic:-

Short term or long term demand for a product.

Industry demand or demand specific to an organization.

Whole market demand or demand specific to a market segment.

2) Determining the time perspective: Depending on the objective, the demand

can be forecast it for a short period (up to 1 year) or long period (beyond 10
years). If an organization performs long-term demand forecasting, it needs to
take into consideration constant changes in the market as well the economy...

3) Selecting the method for forecasting: their various methods of demand

forecasting, however, not all methods suitable for all types of demand
forecasting. Depending on the objective, time period and availability of data, the
organization needs to select the most suitable forecasting method. Yet the
selection of demand forecasting method also depends on the experience and
expertise of the demand forecaster. Demand forecasting methods are broadly
categorized into two types’ qualitative techniques (service and opinion polls) and
quantities techniques (time Series analysis, smoothing techniques, barometric
methods, and econometric methods)

4) Collecting and analyzing data: after selection, the demand forecasting method,
the data needs to be collected. Data can be gathered. Either from primary
sources or secondary sources or both is data is collected in a row form, it needs
to be analyzed in order to derive meaningful information out of it.

5) Interpreting outcomes: after the data is analyzed, it is used to estimate demand

for the predetermined years. Generally, the result obtained is in form of
equations, which needs to be presented in a comprehensible format.
Demand forecasting is the process of using predictive analysis of historical data to
estimate and predict customers' future demand for a product or service. Demand
forecasting helps the business make better-informed supply decisions that estimate the
total sales and revenue for a future period of time.

Demand forecasting helps businesses make informed decisions that affect everything
from inventory planning to supply chain optimization. With customer expectations
changing faster than ever, businesses need a method to forecast demand accurately.

If you’re looking for an ecommerce fulfillment solution to help you improve demand
forecasting, learn more about how Ship Bob helps you replenish stock and deliver the
experience that customers want. Request a pricing quote of our fulfillment services
below.

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Question 2. From the given hypnotical table Calculate Total Cost, Average Fixed Cost,
Average Variable cost and Marginal Cost.

Quantity Total Total Total Average Average Average Marginal

fixed variable cost fixed variable total cost
cost cost cost cost cost
0 100 0
1 100 20
2 100 30
3 100 40
4 100 50
5 100 60

Answer 2 =

Quantity Total Total Total Average Average Average Marginal

fixed variable cost fixed variable total cost
cost cost cost cost cost
0 100 0 100 0 0 0 0
1 100 20 120 100.0 20.0 120.0 20
2 100 30 130 50.0 15.0 65.0 10
3 100 40 140 33.3 13.3 46.6 10
4 100 50 150 25.0 12.5 37.5 10
5 100 60 160 20.0 12.0 32.0 10

To find total cost we used below formula

Total cost (TC) = fixed cost (FC) + variable cost (VC)

To find average fixed cost we used below formula

Average fixed cost = total fixed cost (TC) / output (Q)

To find average variable cost we used below formula

Average variable cost = total variable cost (TVC) / output (Q)

To find average total cost we used below formula

Average total cost = total cost (TC) / output (Q)

To find marginal cost we used below formula

Marginal cost = change in total cost / change in quantity

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QUESTION 3. a) . Suppose the monthly income of an individual increases from Rs

20,000 to Rs 25,000 which increase his demand for clothes from 40 units to 60 units.
Calculate the income elasticity of demand.

3. B). Assume that a business firm sells a product at the price of Rs 500. The firm has
decided to reduce the price of the product to Rs 400. Consequently, the demand for the
product is raised from 20,000 units to 25,000 units. Calculate the price elasticity of
demand.

ANSWER = a) Income elasticity of demand measures the relationship between the

consumer’s income and the demand for a certain good. It may be positive or negative,
or even non-responsive for a certain product. The consumer’s income and a product’s
demand are directly linked to each other, dissimilar to the price-demand equation.

Demand for a normal good grows with an increase in customer wages and vice versa,
assuming other factors of demand are constant. Income elasticity of demand is the level
of response in demand to the adjustment in customer income. The larger the income
elasticity of demand for a certain product, the greater the shift in demand there is from a
change in consumer income.

Income Elasticity of Demand Measurement

The formula for calculating the income elasticity of demand is the percentage change in
quantity demanded divided by the percentage change in income.

That is:-

Income Elasticity of Demand = % △ Demand Quantity (△Qd)

%△ Income (△I)

Where:

% △ Demand Quantity = Change in Demand Quantity / Original Demand Quantity

%△ Income = Change in Income of Consumer / Original Income of Consumer

Income elasticity of demand can be used to determine whether particular commodity is

a necessity or luxury.

Income elasticity of demand is an economic measure of how strongly the quantity

demanded of a good or services respond to change in income.

Business use this metric to predict the impact of economic cycle or sales.

Given-

Initial income (I) = 20,000

Final income = 25,000

Change in income (△I) = 25,000 – 20,000

= 5,000

And

Initial quantity demanded of clothes (Qd) = 40

Final quantity demanded of clothes = 60

Change in quantity demanded of clothes (△Qd) = 60 – 40

= 20

Income elasticity of demand = (△Qd/Qd) / (△I/I)

= (20/40) / (5000/20000)

= (1/2) / (1/4

=2

Thus, income elasticity of demand is 2.

b) ANSWER =

Price elasticity of demand is a measurement of the change in the consumption of a

product in relation to a change in its price.

Economists use price elasticity to understand how supply and demand for a product
changes when its price changes.1 like demand, supply also has elasticity, known as
price elasticity of supply. Price elasticity of supply refers to the relationship between
change in supply and change in price. It’s calculated by dividing the percentage change
in quantity supplied by the percentage change in price. Together, the two elasticity’s
combine to determine what goods are produced at what prices.

KEY TAKEAWAYS

Price elasticity of demand is a measurement of the change in consumption of a product

in relation to a change in its price.

A good is perfectly elastic if the price elasticity is infinite (if demand changes
substantially even with minimal price change).

If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.

If a good’s price elasticity is 0 (no amount of price change produces a change in

demand), it is perfectly inelastic.

If price elasticity is exactly 1 (price change leads to an equal percentage change in

demand), it is known as unitary elasticity.

The availability of a substitute for a product affects its elasticity. If there are no good
substitutes and the product is necessary, demand won’t change when the price goes
up, making it inelastic.

Expressed mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage

Change in Price

Thus, the formula for calculating the price elasticity of demand is as follows

Where, ∆Q = Change in Quantity demanded

∆P = Change in Price
P = initial price

Q = Initial quantity demanded

Ed = price elasticity of demand

Here,

P = 500

∆P = 100 (a fall in price, 500-400 = 100)

Q = 25,000

∆Q = 5,000 (25,000 – 20,000)

By substituting these above in the above formula, we get

Ed = (5,000/100) x (500/25,000)

Ed = 50 x 0.02

Ed = 1

Thus, the absolute value of elasticity of demand is 1. Therefore, in such a case, the
demand for milk is unitary elastic.

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