Final answer:
The costs incurred when making forecasts that are too low include money lost from lower product availability leading to lost sales and the potential loss of future sales. Money lost in paying excess wages is not typically associated with low forecasts but with overestimating demand. Improving forecasting methods is crucial for businesses to handle imperfect information that affects prices, quantity, and quality.
Step-by-step explanation:
When making forecasts that are too low, several types of costs can be incurred by a business. These can include:
- Money lost in lower product availability for customers, as underestimating demand means the business has less stock to meet customer needs. This can lead to missed sales opportunities.
- Money lost in lost sales, because when products are not available, customers may turn to competitors, which affects both current and potential future revenue.
- Money lost in paying wages to workers who are not required is generally not associated with forecasts that are too low, but rather with overestimating demand where businesses hire more workers than needed.
On the other hand, the cost of holding inventory that is never sold is typically associated with overestimation of demand rather than underestimation.
Imperfect information in a business can significantly affect the prices of goods, quantity of production, and quality of the products or services offered. To mitigate these risks, businesses must continually improve their forecasting methods and information systems.