Sales Forecasting Chapter 6

The Incremental Adjustment Model

Future Sales = Previous Demand + Expected

Incremental Sales

MGT 490C Incremental Adjustme 1

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 if you did not stock out. (see Quarterly
Industry report). If you did stock out, you need
to estimate what demand was.
2. For Incremental Sales = (see following slides).
3. Sum impact of all factors and add to Previous
Sales to obtain Future Sales

MGT 490C Incremental Adjustme 2

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.

MGT 490C Incremental Adjustme 3

Calculate expected
change in RGDP
Information to calculate the
expected change is shown on
Quarterly History Report. For
example, for Y3Q1
In Merica:
% change = (98.3-100)/100 = -1.67%
In Sereno:
% change = (105.15-100)/100 = 5.15%

MGT 490C Incremental Adjustme 4

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 products 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 = -.0334 X 112 = - 3.74 rounded to nearest
whole number = -4
For Merica non home areas:
Incremental change = -.0334 X 106 = -3.54 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

MGT 490C Incremental Adjustme 5

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

MGT 490C Incremental Adjustme 6

Seasonal impact
calculation
For Merica home area:
(-21%) x 112 = - 23.52 rounded to - 24
For Merica non home areas:
(-21%) x 106 = - 22.26 rounded to - 22
For Sereno:
(-21%) x 56 = - 11.76 rounded to - 12

MGT 490C Incremental Adjustme 7

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%.

MGT 490C Incremental Adjustme 8

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 = - 10.7 rounded to 11
For Merica non home areas:
(5%) x 2 = - 10% change in unit sales
(-.10) x 106 = - 10.6 rounded to 11
For Sereno area:
(5%) x 2 = - 10% change in unit sales
(-.10) x 56 = - 5.6 rounded to 6

MGT 490C Incremental Adjustme 9

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%.

MGT 490C Incremental Adjustme 10

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

MGT 490C Incremental Adjustme 11

Other changes to consider
Sales Salary
Sales Commission
Number of Salespersons
New Model Introduction
Competitors actions

MGT 490C Incremental Adjustme 12

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.

MGT 490C Incremental Adjustme 13