Question

The following table lists your company’s sales during the last four years.
Year 1: 100 Sales
Year 2: 110 Sales

Year 3: 105 Sales

Year 4: 120 Sales
a. A fellow manager points to the 15-unit increase between year 3 and year 4. Extrapolating this trend, he predicts
135 units will be sold in the coming year (year 5). Do you agree? Explain.

b. A second manager notes that annual sales increases have averaged (120 − 100)/3 = 6.67 units per year.
Accordingly, her forecast for the coming year is 126.67 units sold. Do you agree with this prediction? Explain.

Answer 1

A.

I do not agree, because naive approach is considered in projecting the growth in sales. Here, the growth in the last year, is considered to be the growth in the next year. Here, the growth in the past years 2 and 3 are not considered. So, such a projection is erratic nature.

B.

I do not agree, because it is the arithmetic average of the sales growth in the lest 4 years. Arithmetic averages are less reliable and the manager should go for the geometric mean of the sales growth rate to calculate the sales in next year 5.

Further, manager can go for the weighed average where the higher weight should be given to most recent year. It will give most realist sales growth in year 5.