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Spreadsheet models

Modeling

MGS3100

Julie Liggett De Jong

Deterministic Deterministic

models models

Use influence

U i fl Use influence

U i fl

diagrams to diagrams to

translate black translate black

box relation- box relation-

ships ships

Model

documentation

1

Deterministic Deterministic

models models

model design model design

and layout and layout

Excell tips

E ti &

techniques

•Quantity (Q) Overhead Cost

Basic Profit Model Sales Volume Sunk Cost

Production Fixed Cost (FC)

Volume Variable Cost (VC)

Total Cost (TC)

•Revenue •Breakeven point

•Profit •Crossover point.

2

Basic Profit Model Basic Profit Model

Profit = Revenue – Total Cost

Example:

FC=$150K; SP=$400; VC=$250

What Q will produce profit of $300k?

Find breakeven quantity:

Set Profit = 0 and solve for Q Example, if:

FC = 150,000

VC = 250

SP = 400

3

Crossover Point Crossover Point

Verizon Cellular:

Cross-over Point a/k/a Indifference Point

ProfitA=CMA*QA – FCA SetProfitA=ProfitB Pl

Plan Mi

Minutes R

Rate Add’l

ProfitB=CMB*QB – FCB Solve for Q

cost/min

A 600 $75 .35

B 900 $100 .25

If we know we will use at least 600 minutes

but no more than 900 minutes, at what

quantity of minutes are we indifferent

between the two plans?

Verizon Wireless Plans

Plan A Plan B Plan C

$120 00

$120.00

FC 150 000

150,000 450 000

450,000 2 850 000

2,850,000

$110.00

VC 250 150 100

$100.00

SP 400 400 400

Cost

$90.00

$80.00

$ Calculate

600 minutes

$70.00 900 minutes • Contribution Margin for each plan

$60.00 • Breakeven Point for each plan

• Indifference Points between A & B; B & C;

0

0

60

61

62

63

64

65

66

67

68

69

70

4

Simon Pies 1.Study the environment & frame

Ingredients:

the situation

Filling Decision statement:

Frozen dough

What pie price will maximize profit?

Decision Variable:

Pie Price

Performance

Decision Measure / Parameters:

V i bl

Variable Obj ti

Objective

Unit processing cost

What pie price will maximize profit? Unit ingredients cost

Fixed costs

5

2.Model Formulation 3.Construct the Model

Pie Price

Revenue = Pie Price * Pies Demanded

Unit Cost, Filling

Unit Cost, Dough Model

Unit Pie Processing Cost

Profit Total Cost = Processing Cost + Ingredients Cost + Fixed

Fixed Cost Costs

Exogenous variables Endogenous variables

Cost

Unit Dough Cost)

Simon’s initial model input values Simon’s Pie Weekly Profit Model

Pie Price $8 00

$8.00

Pies Demanded and sold 16

Unit Pie Processing Cost $2.05

g $3.48

Figure 3, p36

6

Present clearly labeled input

variables together.

and Layout

Figure 3, p36

appropriate.

7

Store input variables in separate Format the spreadsheet to simplify

cells & refer to addresses in interpretation.

formulas.

financial results.

Figure 3, p36

8

The model treats Pie Price & Pies Demanded The model treats Pie Price & Pies Demanded

as if they are independent of each other. as if they are independent of each other.

• When price is

Pie Demand 50 $12, demand 50

P ie D e m a n d

P ie D e m a n d

share an 30 30

inverse 20

• For each $1 20

10 10

mathematical reduction in

0 0

relationship. 0 2 4 6

Pie Price 8 10 12 price, an 0 2 4 6

Pie Price 8 10 12

additional

4000 pies sold

What “drives”

drives demand?

Pies Demanded = 48 – 4 * Pie Price

($0 < price < $12)

9

Modify the spreadsheet to include Separate physical results from

this relationship. financial results.

personal computers.

computers Sales volume depends on

the sales price. At $1,000/each, 5,000 computers

will be sold; every increase (or decrease) of $100,

sales will decrease (or increase, respectively) by

1,000 units.

E

Exercise:

i Capstone

C t C

Computer

t z Compute the slope

z Compute the y-intercept

z What is the linear equation that describes the

relationship between demand and price?

10

Computer Demand Computer Demand

15,000 15,000

14,000 14,000

13,000 13,000

12,000 12,000

11,000 11,000

10,000 10,000

9,000 9,000

Demand

Demand

8,000 8,000

7,000 7,000

6,000 6,000

5,000 5,000

4,000 4,000

3,000 3,000

2,000 2,000

1,000 1,000

0 0

$- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 $1,500 $- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 $1,500

Price Price

mathematical relationship. 15,000 – $10 * Sales Price.

Ground to Cover

z What-if & Sensitivity Analysis

z Charts & Graphs

z Calculating % change from

base (demand, revenue, etc.)

z Time Intervals What if / Sensitivity Analysis

z Model validation

z Excel

z Functions: SUM

z Trendline

11

What if Analysis More What If Analysis

Another view . . .

What if we change the

values of two parameters?

Total Cost and Profit?

What effect does a percentage change

in Pie Price have on Profit?

12

Model We assumed a

Validation $2.05 per pie

processing cost

in our model

&

When we review

Simon Pies actual data, we

see that this is

Revisited

only accurate for

base case of 12

thousand Pies

Demanded

We validate the

model by

comparing actual

Processing Cost

data for different

levels of pie

production to our

projected costs.

13

Excel’s Trendline

feature allows us

to fit a trend

equation to the

actual cost data.

and model data

2. Add trendline &

formulas

3. Conduct “What if”

and Sensitivity

Analysis.

14

What if Analysis: Sensitivity Analysis:

processing cost profit when Price &

equation affect Demand change?

profit?

15

Time Intervals

Ground to Cover

z Expanding a product line

z More Charts & Graphs

z Excel

z Functions: IF

z Data Table 1

z Data Table 2

z G

Goal Seek

S

Expanding the

Product Line Each shares same basic model as Apple Pie

Lemon

Strawberry • Lemon: $1.00 less than Apple

• Strawberry: $0.25 more than Apple

Cherry • Cherry: same price as Apple

No historical data

16

Simon’s initial model input values

Unit Cost, Fruit Filling ($ per pie) $3.48 $2.20 $3.90 $3.10

Unit Cost, Dough ($ per pie) $0.30 $0.28 $0.35 $0.33

Fixed Cost ($000’s per week) $33

Pie Demand Intercept 48 43 50 49

Pie Demand Slope -4 -4.4 -4.3 -4.5

Processing Cost Intercept -14.34 -11.66 -13.28 -12.30

Processing Cost Slope 3.38 4.45 3.62 3.25

Figure 2_18

Simon can produce 25 thousand pies a

Weekly Pie Revenue, Costs & Contribution

100% week

90%

80%

70%

60% Contribution Producing more than 25 thousand pies a

50% Ingredients Cost

Processing Cost

week requires a second shift.

40%

30% Revenue

20%

10%

0% A second shift incurs overtime costs of

Apple Lemon Strawbry Cherry $0.80 for each pie produced

Figure 2_19

17

Normal Pie Processing Capacity and Overtime Processing Processing Cost has been broken up into Normal Processing

Cost parameters have been added. Cost and Overtime Processing Cost.

Figure 2_20 Figure 2_20

What if

if”

pie prices, and thus reducing pie demand? analysis

g

Tabulates results into rectangular array

y of

If Simon

Si can raise

i the

th Normal

N lP

Production

d ti cells (a table)

Capacity above the 25 thousand limit, how

much would profit increase?

18

Excel’s Data Table Option Excel’s Data Table Option

Manipulates one exogenous (input) variable Manipulates two exogenous (input) variables

and calculates the results of several parameters and reports the results for a single endogenous

and / or endogenous (output / performance (output/ performance) variable.

variables).

variables)

Can the overtime cost be reduced by Decision Variable: Apple Pie Price

raising pie prices,

prices and thus reducing pie Parameter: Normal Processing Capacity

demand? Performance Variable: Total Profit

If Simon

Si can raise

i the

th Normal

N lP

Production

d ti

Capacity above the 25 thousand limit, how Our model facilitates this type of analysis:

much would profit increase ?

If we change the Apple pie price the other pie

prices will also change. Figure 2_23

19

We can easily chart our results!

Excel’s Data Table 2

1. Define value ranges for 2 exogenous variables. Profit vs Pie Price & Capacity

$84.00

2 Enter cell reference for single performance

2.

$83.00

measure in upper left hand corner. 25

$82.00 26

$81.00

P rofit

27

3. Select all cells in the rectangular range, I3:016. 28

$80.00

$79.00 29

4. Run Excel’s Data Table command: $78 00

$78.00 30

$77.00

For Excel 2003: For Excel 2007:

$9.20 $9.30 $9.40 $9.50 $9.60 $9.70 $9.80 $9.90 $10.00

Select Data > Table Select Data > What-if Analysis > Data Table

Apple Pie Price

5. Specify the Row and Column input cells; click OK. Figure 2_25

price what happens Data Table 1

to demand, revenue, overtime cost, and

profit? Manipulates one exogenous (input) variable

and calculates the results of several parameters

and / or endogenous (output / performance

variables).

variables)

Figure 2_28

20

Excel’s Data Table 1

1. Specify values of input variable in an empty row

or column on worksheet.

2 Place labels for endogenous variables in separate

2.

rows.

3. Input cell references for parameter values that will END OF CHAPTER 2

be recalculated.

4. Select all cells in the rectangular range, I22:S26

5. Run Excel’s Data Table command:

For Excel 2003: For Excel 2007:

Select Data > Table Select Data > What-if Analysis > Data Table

21

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