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Forecasting Monthly Sales Essay

Background

For years The Glass Slipper restaurant has operated in a resort community near a popular ski area of New Mexico. The restaurant is busiest during the first 3 months of the year, when the ski slopes are crowded and tourists flock to the area. When James and Deena Weltee built The Glass Slipper, they had a vision of the ultimate dining experience. As the view of surrounding mountains was breathtaking, a high priority was placed on having large windows and providing a spectacular view from anywhere inside the restaurant. Special attention was also given to the lighting, colors, and overall ambiance, resulting in a truly magnificent experience for all who came to enjoy gourmet dining. Since its opening, The Glass Slipper has developed and maintained a reputation as one of the “must visit” places in that region of New Mexico.

While James loves to ski and truly appreciates the mountains and all that they have to offer, he also shares Deena’s dream of retiring to a tropical paradise and enjoying a more relaxed lifestyle on the beach. After some careful analysis their financial condition, they knew that retirement was many years away. Nevertheless, they were hatching a plan to bring them closer to their dream. They decided to sell The Glass Slipper and open a bed and breakfast on a beautiful beach in Mexico. While this would mean that work was still in their future, they could wake up in the morning to the sight of the palm trees blowing in the wind and the waves lapping at the shore. They also knew that hiring the right manager would allow James and Deena the time to begin a semi-retirement in a corner of paradise. To make this happen, James and Deena would have to sell The Glass Slipper for the right price. The price of the business would be based on the value of the property and equipment, as well as projections of future income.

Problem Statement

James and Deena are currently the owners of The Glass Slipper, a popular ski resort in New Mexico. Their dream is to retire and move to a more tropical location. While they understand that full retirement is not an option at this point, they are willing to sell The Glass Slipper and open a bed and breakfast on a Mexico beach which affords them a semi-retirement option for their near future plans. In order for them to have enough profit from the sale to complete their intended lifestyle transition, they are requiring the sale price to include property and equipment as well as future sales projections. Using data from the previous three years, a projection of the following year’s data will be made and evaluated.

Data

Monthly Revenue (In $1,000’s)

Problems

1. Prepare a graph of the data. On this same graph, plot a 12-month moving average forecast. Discuss any apparent trend and seasonal patterns.

The seasonal pattern shows that through the summer and fall there is reduced sales revenue that can be attributed to the lack of snow covering the resort area, but still being a location people like to visit. As the snow accumulation increases starting in late fall, sales begin to pick up and reach the maximum levels in the early part of the years during January. Sales remain high during this winter time frame until significant decreases in the spring through fall months.

2. Use regression to develop a trend line that could be used to forecast monthly sales for the next year. Is the slope of this line consistent with what you observed in question 1? If not, discuss a possible explanation.

The trend line that could be used is Y = 330.889 – 1.162 * Time. The slope of this trend line is negative and not consistent with what was observed in question 1. Fluctuations in the seasonal indices, specifically January and February, are affecting the unadjusted data and creating a negative slope trend.

3. Use the multiplicative decomposition model on these data. Use this model to forecast sales for each month of the next year. Discuss why the slope of the trend equation with this model is so different from that of the trend equation in question 2.

Table 1.1
The sales forecast for the next year is shown in the Adjusted Forecast column of Table 1.1. Trend line data for the multiplicative decomposition model is Y = 294.524 + .86 * Time. The reason for the trend line difference from question 2 is that when you use the decomposition method, you are taking into account seasonal indices that are used in the computation to deseasonalize the data for a more accurate determination of predicted sales. Utilizing this model is more likely to produce a more accurate forecast for James and Deena in order to set their selling price.


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