Question

compute profit (in $) per unit for the base-case scenario.$ /unit(b)compute profit (in $) per unit for the worst-case scenario.$ /unit(c)compute profit (in $) per unit for the best-case scenario.$ /unit(d)construct a simulation model to estimate the mean profit (in $) per unit. (use at least 1,000 trials. round your answer to two decimal places.)$ (e)why is the simulation approach to risk analysis preferable to generating a variety of what-if scenarios?simulation will provide ---select--- of the profit per unit values which can then be used to find ---select--- of an unacceptably low profit.(f)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. (round your answer to three decimal places.)

Answer 1

For the base-case scenario, the WipeOut Ski Company has a loss of $1 per unit. Without specific best-case scenario data, we assume that at the current price, profits cannot increase due to the marginal cost exceeding price. A simulation model with 1,000+ trials is needed to assess mean profit and risk, which is preferable for its comprehensive analysis capabilities.

Step-by-step explanation:

Profit Computation and Simulation Analysis

To compute the profit (in $) per unit for various scenarios for the WipeOut Ski Company:

• Base-case scenario: With total revenues of $125 (five units at $25/unit) and total costs of $130, the firm experiences a loss of $5, which translates to a loss of $1 per unit (total loss divided by the quantity).
• Worst-case scenario: If the price is below the average cost of $26/unit, the firm incurs a loss. Given the price of $25/unit, the loss is $1 per unit.
• Best-case scenario: The information provided does not delineate a best-case scenario, but if the price were above the average and marginal costs, the profit per unit would be positive. However, since the marginal cost is $30/unit which is higher than the price, producing more units will not result in positive profit.

To construct a simulation model for estimating mean profit per unit, we would use hypothetical values and run at least 1,000 trials. Note that without specific data or a provided model, exact simulation results cannot be calculated here.

Simulation is a preferred method for risk analysis as it generates a range of profit per unit values, enabling analysts to estimate variability and the likelihood of unacceptable outcomes.

For estimating the probability that the profit per unit will be less than $5 using simulation, one would calculate the frequency of such events in the simulation trials and divide by the total number of trials to get the probability.