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 $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows: Procurement Cost ($) ProbabilityLabor Cost ($) ProbabilityTransportation Cost ($) Probability 100.25200.1030.75 110.45220.2550.25 120.30240.35 250.30
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.
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.
2 answers:
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
b) based on simulation model mean profit = 45 - 11 - 24 - 5 = $ 5/ unit and 45 - 10 - 25 - 3 = $ 7 / unit
(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.
d) As evaluated 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.
Explanation:
simulaton model for b is in the attachment below.
You might be interested in
Solution :
c. MC=MR is the profit maximizing equilibrium point. The price rise beyond that is likely to raise the total revenue. But the total cost might increase equally or more then that to nullify or decrease the profit.
d. (i). The demand increase implies that the AR (demand) curve shifts rightwards. This will increase the equilibrium price.
(ii). Change in demand does not affect the total cost.
a. Monopoly might continue to produce in short earn even if its AR < AC. It continues to do so until shut down point. It refers that production continued until average revenue (AR) is greater than equal to the average variable cost (AVC). The monopoly is a market with a single seller.
This market's average revenue (AR) demand curve is above its marginal curve . The curves are downward sloping, illustrating price demand inverse relationship.
Equilibrium quantity : when the marginal revenue = marginal cost
Equilibrium price : equilibrium quantity corresponding price at AR (demand ) curve.
