Estimates of Sales & Production

In estimating sales revenues, the following considerations should be borne in mind:

• It is not advisable to assume a high capacity utilization level in the first year of operation. Even if the technology is simple and the company may not face technical problems in achieving a high rate of capacity utilization in the first year itself, there are likely to be other constraints like raw material shortage, limited power, marketing problems, etc. it is sensible to assume that capacity utilization would be somewhat low in the first year and rise thereafter gradually to reach the maximum level in the third or fourth year of operation.
• It is not necessary to make adjustment for stocks of finished goods. For practical purposes, it may be assumed that production would be equal to sales.
• The selling price considered should be the price realizable by the company net of excise duty. It shall, however, include dealers’ commission which is shown as an item of expense as part of sales expenses.
• The selling price used may be the present selling price: it is generally assumed that changes in selling price will be matched by proportionate changes in cost of production. Sales and production are closely interred –related. Hence, they may be estimated together.