The management of Madeira Manufacturing Company is considering the introduction

Question

The management of Madeira Manufacturing Company is considering the introduction of a new product. The fixed cost to begin the production of the product is $27,000. The variable cost for the product is expected to be between $17 and $31 with a most likely value of $24 per unit. The product will sell for $35 per unit. Demand for the product is expected to range from 500 to 1800 units, with 1200 units the most likely demand.

A. Develop the profit model for this product. Enter your answer in the form of an expression. (Example: (c+10)x+800)

Profit =  

B. Provide the base-case, worst-case and best-case analyses. For those boxes in which you must enter subtractive or negative numbers use a minus sign. (Example: -300)

C. Discuss why simulation would be desirable.

A simulation the probability of each scenario.

Explanation / Answer

Part A

We know profit is (price – variable cost per unit) x no. of units – fixed cost

Therefore, profit model would be:

Profit = (35-C) X -27,000

Part B-1 BASE CASE

C= 24

X=1200

Profit = (35-C) X -27,000

            = (35-24) x 1200 -27000

            = 13200-27000

                =-13,800

Part B-2 WORST CASE

C= 31

X=500

Profit = (35-C) X -27,000

            = (35-31) x 500 -27000

            = 2000-27000

                =-25,000

Part B-3 BEST CASE

C= 17

X=1800

Profit = (35-C) X -27,000

            = (35-17) x 1800 -27000

            = 32400-27000

                =-5,400

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