Question

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.

Answer 1

(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.

Step-by-step explanation:

simulaton model for b is in the attachment below.