Problem 1 The management of Brinkley Corporation is interested in using simulati
ID: 468026 • Letter: P
Question
Problem 1 The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for a new product. The selling price for the product will be $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows:
a. Compute profit per unit for the base-case, worst-case, and best-case scenarios.
b. Construct a simulation model to estimate the mean profit per unit.
c. Why is the simulation approach to risk analysis preferable to generating a variety of what-if scenarios?
d. Management believes the project may not be sustainable if the profit per unit is less than $5. Use simulation to estimate the probability the profit per unit will be less than $5.
Procurement Probability Labor Probabilty Trasportation Probability 10 0.25 20 0.10 3 0.75 11 0.45 22 0.25 5 0.25 12 0.30 24 0.35 25 0.30Explanation / Answer
Answer (a) : Profit = Selling price -purchase cost - labour cost -transportation cost
Profit per unit for the base-case = 45 - 11 - 24 - 3 = $ 7 / unit
Profit per unit for the worst-case = 45 - 12 - 25 - 5 = $ 3/ unit
Profit per unit for the best-case = 45 - 10 - 20 - 3 = $ 12 / unit
Answer (b) : Simulation model
based on simulation model mean profit = 45 - 11 - 24 - 5 = $ 5/ unit and 45 - 10 - 25 - 3 = $ 7 / unit
Answer (c) : Simulation approach will provide a distribution of the profit per unit values. By calculating percentage of simulation trials provide us profit in what-if scenario.
Answer (d) : As calculated above, based on simulation model, minimum profit is $ 5/ unit. Hence management's belief of non-sustainability of project is right. Less than $ 5 / unit profit scenario is unacceptably low.
Procurement cost($) Probability Labour cost ($) Probability Transportation cost($) Probability 10 0.00 but less than 0.25 20 0.00 but less than 0.10 3 0.00 but less than 0.75 11 0.25 but less than 0.70 22 0.10 but less than 0.35 5 0.75 but less than 1.00 12 0.70 but less than 1.00 24 0.35 but less than 0.70 25 0.70 but less than 1.00Related Questions
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