Preparing an Operating Budget—Forecasting Sales and Revenues

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Forecasting next year's sales

There is more than one way to forecast future sales. Choose the method that will give you the most accurate projection.

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It's November. You are trying to forecast next year's sales at your Los Angeles-based beach ball company, Beachy Keen.

This past year was rough. El Niño (a seasonal warming of the tide) caused larger than usual waves in Southern California. People filled amusement parks instead of beaches.  Luckily, next year's weather is predicted to be back to normal—and you plan to seize the opportunity to launch a new marketing campaign.

What data should you use to forecast next year's sales?

Not the best choice. Because beach ball sales are seasonal, using any single month as a base for projections will yield a result that is either too high or too low.


Not the best choice. El Niño caused poor beach conditions and low sales this past year, so higher sales are a reasonable projection for next year.


Correct choice. El Niño caused poor beach conditions and low sales this past year, so higher sales are a reasonable projection for next year. In addition, your new marketing campaign will likely increase revenues.


It's November, two years later. You recently invested in a new product, "AirEarth," a beach ball you can sell around the world.

The new AirEarth ball has been selling globally for three months." Sales have smashed expectations—after all, it's always summer somewhere, and everyone seems to want one of your AirEarth balls! 

What method should you use to forecast next year's sales of AirEarth balls?

Correct choice. The run rate is appropriate for a relatively new product that does not have an established track record.


Not the best choice. Since the product only has a three-month history, using last year's annual sales would likely result in a projection that is too low.


Not the best choice. You don't have enough data from your new product to know whether this estimate will be accurate.


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