1.Answer.

Every business involves certain risks and uncertainties, especially in today's dynamic world. If
these risks are not mitigated on time, it may have to huge losses for organizations.
Organizations can cope with these risks by determining the future demand or sales prospects
for their products or services. Demand forecasting is a combination of two words; the first one
is Demand and another forecasting. Demand means outside requirements of a product or
service. In general, forecasting means estimating the present for a future occurring event. The
purpose of demand forecasting is to predict the demand for a company's products or services in
the future.Demand forecasting requires the collection of correct data. Without accurate data,
the exact demand for an organization's products and services cannot be predicted. Thus, it can
be said that the effectiveness of demand forecasting depends on the accuracy of the data.

Demand plays a vital role in the decision-making of a business. Demand forecasting is helpful
for both new as well as existing organizations in the market. For instance, a new organization
needs to animate demand to expand its scale of production. On the other hand, an existing
organization requires demand forecasts to avoid problems, such as overproduction and
underproduction. In competitive market conditions, there is a need to take the correct decision
and make plans for future events related to business like a sale, production, etc. The
effectiveness of a decision taken by business managers depends upon the accuracy of the
decision taken by them.

Demand is the most important aspect for a business for achieving its objectives. Many decisions of
business depend on demand like production, sales, staff requirement, etc. Forecasting is a necessity
of business at an international level as well as a domestic level. Demand forecasting reduces risk
related to business activities and helps it to take efficient decisions. For firms having production at
the mass level, the importance of forecasting had increased more. Good forecasting helps a firm in
better planning related to business goals. There is a huge role in forecasting in functional areas of
accounting. Good forecast helps in appropriate production planning, process selection, capacity
planning, facility layout planning, inventory management, etc. Demand forecasting provides
reasonable data for the organization’s capital investment and expansion decisions. It also provides a
way for the formulation of suitable pricing and advertisement strategies.
Data collection is a process of accumulating facts and figures about the variables of interest in
a systematic manner. Data can be collected from primary sources (such as surveys,
observations, interviews, and questionnaires) or secondary sources (for example, the Internet,
newspapers, magazines, company accounting records, company re- ports, journals, books,
etc.). Data collection is a systematic process and involves several steps such as identifying the
purpose of data collection, selecting an issue, and or opportunities, setting goals then collecting
data and its analysis as well as interpretation.

Steps in Demand Forecasting

To achieve the desired results, it is important that demand forecasting is done systematically.
Demand forecasting involves several steps, which are explained below:

a) Specifying the objective: The purpose of demand forecasting needs to be specified before
starting the process. The objective can be specified on the following basis:

1) Short-term or long-term demand for a product,

2) Industry demand or demand specific to an organization,

3) Whole market demand or demand specific to a market segment

b) Determining the time perspective: Depending on the objective, the demand can be
forecasted for a short period (up to one year) or a 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 as the economy.

c) Selecting the forecasting method: Choosing the most appropriate forecasting method
depends on the objective, time period, and availability of data. The selection of a demand
forecasting method also depends on the experience and expertise of the demand forecaster.

d) Collecting and analyzing data: After selecting the demand forecasting method, the data
needs to be collected. Data can be gathered either from primary sources or secondary sources
or both. As data is collected in the raw form, it needs to be analyzed to derive meaningful
information from it.

e) Interpreting outcomes: After the data is analyzed, it is used to estimate demand for the
predetermined years. Generally, the results obtained are in the form of equations, which need
to be presented in a comprehensible format.

Demand forecasting is an imperfect science, but it is also a necessity for several reasons given
below:

Support Deliverables Planning– Proper forecasting can help determine when increases in
deliveries are needed. Historical reports may be used to research whether demand for a certain
product increases during certain times of the year. The inventory levels for the store can then be
increased during that time of the year to meet customer demands. The same effort is used to
reduce deliveries, as well. When demand decreases throughout the year, then fewer inventories
can be ordered to reduce overstock. In essence, forecast information allows organizations to
devise and execute transportation planning economically and effectively.

Enhanced Growth Prediction– Demand forecasting helps an organization in deciding about the
expansion of its business. If the expected demand for products is higher, then the organization
may plan to expand further. On the other hand, if the demand for products is expected to fall, the
organization may cut down the investment in the business. This further helps an organization to
hire human resource according to requirement. For example, if an organization expects a rise in
the demand for its products, it may opt for extra labor to fulfill the increased demand.

Better Financial Management-Proper forecasting will lead to accuracy in the purchasing and
planning department, which can provide savings to the company. Spending excess amounts on
unwanted inventory prevents the company from using this money on other vital resources. Some
of these resources, such as investments, are important for growth and development of the
company. Proper forecasting also helps the company purchase smaller amounts of inventory.
These smaller quantities allow the company to remain flexible by being able to quickly respond
to any changes in consumer demand.
Accurate Inventory Levels-Accuracy in sales forecasting allows supply chain managers to make
accurate predictions in the level of inventory required to meet customer demand. An organization
that practices lean philosophies must have the ability to make accurate predictions on the level of
inventory necessary to produce products. Lean management requires the company to keep the
lowest level of inventory in stock to meet the demand. With lower levels of inventory, the
accuracy of the amount stored on hand becomes even more important. Inaccurate forecasts can
result in overstocking or stock outs.

Thus, Demand forecasting in an organizations plays a vital role in business organizations.

2. ANSWER.

A firm carries out business to earn maximum profits. Profits are the revenues collected by a
business firm after production and sale of their goods and services. But to gain something, the
producer has to lose something. That means, to earn revenues the producer has to incur costs. A
cost is an expenditure incurred by a firm to produce goods and services for sale in the market. In
other words, a cost is the outflow of money from the business to gain inflow of money after sale
of the commodity. A producer has to incur various costs in order to produce goods and services.

Total cost: Total cost is the total expenditure incurred by the producer to produce his goods.
Total cost is also the summation of total fixed costs and total variable costs. Total cost is
evaluated as follows:-

1. Total Cost = Cost per unit x Quantity Produced

2. Total Cost = Total Fixed Cost (TFC) + Total Variable Cost (TVC)

Total cost is defined as follows: “Total cost is the cost which is incurred by the producer to
produce a particular quantity of the commodity.”

Uses of total cost:

 Helps in economies of scale as a producer needs large amount of raw materials for large
production;
 Helps in pricing policy;

 Helps in decision – making;

Average Total Cost (ATC) Or Average Cost (AC): An average cost is the expenditure incurred
by the producer, for producing each unit of the products. An average cost is the per unit
expenditure of the producer. Average cost is also the summation of average fixed cost and
average variable cost.

It is calculated by dividing TC by total output.

AC = TC / Q
where AC = Average Cost, TC = Total Cost, Q = Quantity of output.

Average cost = Total Cost Quantity produced

Average cost is also defined as the sum of average fixed cost and average variable cost.
AC= AFC + AVC

Average Fixed Costs (AFC): Average fixed cost refers to the per unit fixed cost of production.
It is calculated by dividing TFC by total output i.e.,
AFC= TFC / Q
where, AFC = Average Fixed Cost, TFC = Total Fixed Cost , Q = Quantity of output.

Average Variable Cost (AVC): Average variable cost refers to the per unit variable cost of
production.
It is calculated by dividing TVC by total output.
AVC = TVC / Q
where AVC = Average Variable Cost, TVC = Total Variable Cost, Q = Quantity of output

Uses of average cost:

 Helps to cut down excess expenditure, as per unit cost is calculated;

  Helps in optimum utilization of resources;

 Helps in pricing strategy.

Marginal cost:

Marginal cost is the expenditure incurred by the producer to produce an additional or an extra
unit of the commodity. Marginal cost is the additional cost incurred for producing one extra unit
after producing certain amount of units.

MCn = TCn – TCn-1

Marginal cost is defined as follows: “Marginal cost is the cost or expense incurred for producing
an additional or an extra unit of a commodity.”

Uses of marginal cost:

 Helps in decision making

 Helps to determine costs for each commodity

 Helps in planning profits.

Quantit Total Total Total Cost (TC) Average Average Average Marginal
y Fixed Variable Fixed Variable Total Cost
(Q) Cost Cost TC=TFC+TVC Cost Cost Cost (Change In
(TFC) (TVC) (TFC/Q) (TVC/Q) (TC./Q) TC /Change
In Q)
0 100 0 100 - - - -
1 100 20 120 100/1=100 20/1=20 120/1=120 20/1=20
2 100 30 130 100/2=50 30/2=15 130/2=65 10/1=10
3 100 40 140 100/3=33.3 40/3=13.33 140/3=46. 10/1=10
3 66
4 100 50 150 100/4=25 50/4=12.5 150/4=37. 10/1=10
5
5 100 60 160 100/5=20 60/5=12 160/5=32 10/1=10

3. a. ANSWER:

 The term “income” generally refers to the amount of money, property, and other
transfers of value received over a set period of time in exchange for services or products.
 Income elasticity of demand refers to the sensitivity ratio between the quantity of a
specific product and the change in the real income of consumers who buy this product,
keeping other things constant.
 The formula for measuring income elasticity of demand is the percentage increase in
demand quantity divided by the rise in sales rate. With income elasticity of demand, one
can say whether a particular product represents an essential requirement or a luxury.

 For a certain product, the income elasticity of demand can be positive or negative, or
non-responsive.
 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

Given,
Change in income (ΔI) =25000-20000=5000
And
Change in quantity demanded of clothes (Δ Qd) = 60-40=20
Initial income ( I) = 20000
Initial quantity demanded of clothes (Qd) = 40
Income elasticity of demand is calculated as:
(Δ Qd/Qd )/ (ΔI/I)
= (20/40)/(5000/20000)
= (1/2)/(1/4)
=2
Income elasticity of demand = 2
Uses of Income Elasticity of Demand
1. Forecasting demand
Forecasting demand applies to the idea that the income elasticity of demand tends to predict
demand for commodities in the future. If there is a substantial change in wages, the change in
demand for products will also be significant. This is because when buyers become aware of a
shift in income, they will change their preferences and expectations for such products.

2. Investment decisions
The idea of national income is very important to businesses as it helps them to decide which
sectors they should invest their money in. In general, investors tend to invest in markets where
they can predict that the demand for commodities is related to a growth in national income or
where the income elasticity of demand is greater than negligible.

3. b. Answer:

 Elasticity is an economics concept that measures the responsiveness of one variable to

changes in another variable. Price elasticity of demand is a measure of a change in the
quantity demanded of a product due to a change in the price of the product in the market.
Knowing the price elasticity of demand of a good allows someone selling that good to
make informed decisions about pricing strategies. This metric provides sellers with
information about consumer pricing sensitivity. It is also key for makers of goods to
determine manufacturing plans, as well as for governments to assess how to impose taxes
on goods.

 Price elasticity of demand can be defined as the ratio of the percentage change in
quantity demanded to the percentage change in price. can be mathematically expressed
as:

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:

eP= (Change in quantity demanded/change in price) x ( P/Q)

Where,
eP = Price elasticity of demand
P = Initial price
Q=Initial quantity demanded

Here,
P=500
Change in price =100 (a fall in price; 500-400 = 100)
Q=20,000 units
Change in quantity demanded = 5,000 (25,000 - 20,000)

By substituting these values in the above formula, we get:

eP= (Change in quantity demanded/change in price) x ( P/Q)
eP = (5000/100) X (400/20000)

eP = 1

Thus, Here the price elasticity of demand is 1 which indicates that quantity changes at the
same rate as price.