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In this analysis, you will be generating multiple sales forecasts based on different modeling assumptions.

In this scenario, you will be working with a business that offers three types of services to the public. You will be evaluating the effects of different assumptions related to sales level, sales price and service mix.

Begin with the information below for 2017:

Januar Februa Augus Novemb Decemb SeptembOctob er Y March April May June July er Volume Service A 120 140 160 100 50 75 55 60

Requirements:

1) Using the information from 2017, create a sales and profit forecast based on each of the following three scenarios:

Scenario 1 (Good Year)

  • Sales of Service A begin at their December 2017 levels, and increase as they did in 2017, but there is no seasonality decrease beginning in August, the climb continues through the end of the year.
  • Sales of Service B begin at their January 2017 level but increase at twice the pace of 2017.
  • Sales of Service C begin at their January 2017 level and remain constant throughout the year.
  • Beginning in August, prices on all services are raised by 10%
  • Margins on all products are 10% higher than 2017, and beginning in June margins on service B grow at 2% per month

Scenario 2 (Average Year)

  • Product sales levels begin at their December 2017 level, and grow or shrink based on their percentage growth or reduction from 2017.
  • All prices remain the same.
  • Margins on Service A grow by 2%, while margins on Service B shrink by 1%

Scenario 3 (Poor Year)

  • Product sales levels begin at their January 2017 level.
  • Sales of Service A grow at 10% per month until August, then shrink at 15% per month.
  • All other sales levels are flat.
  • Prices for Service A and C are reduced 5% in March, the price for Service B is reduced 15% in February.
  • Margins are cut across the board by 5% in September.

Include a copy of your Microsoft Excel spreadsheet that demonstrates your calculations.

Include a one-page description of the overall impacts of each scenario on the business.

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Answer #1

Scenario 1 (Good Year) April May June January February March July August September October November December Volume Service S

Overall Impact of Each Scenario on the Business

  1. Scenario 1 (Good Year)

As the name suggests the Good year, the first scenario gives an increase in the sales volume as well as the profit figures. With the increase in sales volume for Service A& B and constant as in 2017 for Service C, the Unit Fixed Cost will decrease (since the average fixed cost per unit has an inverse relationship to the sales volume) and the Total Variable Cost will increase (Cost Behaviour) because it costs more to increase output. Sale Price increase with the increase in sales volume has resulted in an invariable increase in the Profits for the year, which shows with the increased Margin Percentage. This also results in a lower Break-Even Volume. Overall the increase in Sales Volume for two services and the same level for the third one and an increase in overall prices has resulted this year in the Good Year.

  1. Scenario 2 (Average Year)

Though the name of the scenario is Average Year, given the data and resultant total profit from the data it is even better than the Good Year Scenario. Since the sales levels being as Dec. 2017 which are comparatively high and with the same trend as in 2017, little decrease in the margin but same price levels, has given good results. The Break-Even Volume and the Fixed Cost both would be giving better figures as compared to the 2017 level.

  1. Scenario 3 (Poor Year)

With lower sales volume in Service A&B, a reduction in prices and profit margin, this scenario gives the lowest total profit amount. The major support in this poor year can be given to the decreasing sale prices in all three services. Since the prices and the sales volume have declined as compared to 2017 levels, the Fixed Cost per unit would be increased. The Break-Even Level would be much higher in comparison to the 2017 levels and the above two scenario levels. Decreasing sales volume will only decrease fixed unit costs when the quantity produced drops so low that production assets are sold or a less expensive facility is located. The business should tackle this scenario by decreasing the prices further that could result in an increase in the sales volumes as per Demand-Supply Play. But unfortunately, this also lowers your contribution margin.

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