Spreadsheet Models

Week 13 - 14

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Introduction
• Spreadsheet models are mathematical and logic-based models
• Referred to as what-if models
• Provide easy-to-use, sophisticated mathematical and logical functions
• Allow for easy instantaneous recalculation for a change in model inputs
• Are less expensive
• Often come preloaded on computers
• Are fairly easy to use
• The most used business analytics tool

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Building Good Spreadsheet
Models
Influence Diagrams
Building a Mathematical Model
Spreadsheet Design and Implementing the Model in a Spreadsheet

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Building Good Spreadsheet Models
• Total cost of manufacturing a product is the sum of two costs:
• Fixed cost: Portion of the total cost that does not depend on the production
quantity and remains the same no matter how much is produced
• Variable cost: Portion of the total cost that is dependent on and varies with
the production quantity
• Make-versus-buy decision: comparing the costs of manufacturing
in-house to the costs of outsourcing production to another firm

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Building Good Spreadsheet Models
Influence Diagrams
• An influence diagram is a visual representation that shows which
entities influence others in a model
• Parts of the model are represented by circular or oval symbols called
nodes, and arrows connecting the nodes show influence

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Figure 10.1: An Influence Diagram for Nowlin’s
Manufacturing Cost

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Figure 10.2: An Influence Diagram for Comparing
Manufacturing Versus Outsourcing Cost for Nowlin
Plastics

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Building Good Spreadsheet Models
Building a Mathematical Model
• Consider the cost of manufacturing the required units of the Viper
• As the influence diagram shows, this cost is a function of the fixed
cost, the variable cost per unit, and the quantity required
• Define notation for every node in the influence diagram:
• q = quantity (number of units) required
• FC = the fixed cost of manufacturing
• VC = the per-unit variable cost of manufacturing
• TMC(q) = total cost to manufacture q units

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Building Good Spreadsheet Models
• The cost-volume model for producing q units is
TMC(q) = FC + (VC × q)
• For the Viper, FC = $234,000 and VC = $2, so
TMC(q) = $234,000 + $2q
• Mathematical model for purchasing q units is
TPC(q) = Pq
P = the per unit purchase cost
TPC(q) = the total cost to outsource or purchase q units
• For the Viper, since P = $3.50, TPC(q) = Pq
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Building Good Spreadsheet Models
• Mathematical model for the savings associated with outsourcing
S(q) = TMC(q) – TPC(q)
S(q) = the savings due to outsourcing
• Nowlin has to decide, “For what quantities is it more cost-effective to
outsource rather than produce the Viper?”
• Mathematically, this question is, “For what values of q is S(q) > 0?”

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Building Good Spreadsheet Models
Spreadsheet Design and Implementing the Model in a Spreadsheet
• For the Nowlin Plastics problem, we have defined the following
components:
q, FC, VC, TMC(q), P, TPC(q), S(q)
• TMC, TPC, and S are the functions of other components, whereas q,
FC, VC, and P are not
• TMC, TPC, and S will be formulas involving other cells in the
spreadsheet model, whereas q, FC, VC, and P will just be entries in
the spreadsheet

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Building Good Spreadsheet Models
• The number of Vipers to make or buy for next year is really a decision
Nowlin gets to make, hence we refer to quantity q as a decision
variable
• FC, VC, and P are measurable factors that define characteristics of
the process we are modelling, hence we refer to FC, VC, and P as
parameters

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Figure 10.3:Nowlin Plastics Make-Versus-Buy
Spreadsheet Model

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Building Good Spreadsheet Models
• The general principles of spreadsheet model design and construction
are:
• Separate the parameters from the model: This enables the user to update
the model parameters without the risk of mistakenly creating an error in a
formula
• Document the model and use proper formatting and color as needed: A
good spreadsheet model is well documented. Clear labels and proper
formatting and alignment facilitate navigation and understanding
• Use simple formulas: Clear, simple formulas can reduce errors and make
maintaining the spreadsheet easier. Long and complex calculations should
be divided into several cells

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What-If Analysis
Data Tables
Goal Seek

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What-If Analysis
Data Tables
• Data Table: Excel tool which quantifies the impact of changing the
value of a specific input on an output of interest
• One-way data table: summarizes a single input’s impact on the
output
• Two-way data table: summarizes two inputs’ impact on the output

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Figure 10.4: The Input for Constructing a One-Way
Data Table for Nowlin Plastics

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Figure 10.5 Results of One-Way Data Table for
Nowlin Plastics

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Figure 10.6: The Input for Constructing a Two-Way Data
Table for Nowlin Plastics

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Figure 10.7: Results of Two-Way Data Table for
Nowlin Plastics

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What-If Analysis
Goal Seek
• Goal Seek: Excel tool that allows the user to determine the value of
an input cell that will cause the value of a related output cell to equal
some specified value (the goal)
• In the case of Nowlin Plastics, suppose we want to know the value of
the quantity of Vipers where it becomes more cost effective to
manufacture rather than outsource

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Figure 10.8: Goal Seek Dialog Box for Nowlin
Plastics

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Figure 10.9: Results from Goal Seek for Nowlin Plastics

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Some Useful Excel Functions for
Modeling
SUM and SUMPRODUCT
IF and COUNTIF
VLOOKUP

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Some Useful Excel Functions for Modeling
SUM and SUMPRODUCT
• SUM: Function that adds up all of the numbers in a range of cells
• SUMPRODUCT: Function that returns the sum of the products of
elements in a set of arrays

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Figure 10.10: What-If Model for Foster Generators

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Some Useful Excel Functions for Modeling
IF and COUNTIF
• =IF(condition, result if condition is true, result if condition is false)
• =COUNTIF(range, condition)
• Counts the number of components having a positive order quantity
Illustration:
• Gambrell Manufacturing produces car stereos
• Gambrell likes to keep its components inventory to a minimum
• Hence, it uses an inventory policy known as an order-up-to policy
• Order-up-to policy: Whenever the inventory on hand drops below a certain level,
enough units are ordered to return the inventory to that predetermined level

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Figure 10.11: Gambrell Manufacturing Component
Ordering Model

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Some Useful Excel Functions for Modeling
VLOOKUP
• This function allows the user to pull a subset of data from a larger
table of data based on some criterion
• General form =VLOOKUP(value, table, index, range)
where,
value = the value to search for in the first column of the table
table = the cell range containing the table
index = the column in the table containing the value to be returned
range = TRUE if looking for the first approximate match of value and
FALSE if looking for an exact match of value

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Figure 10.12: Granite Insurance Bonus Model

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Auditing Spreadsheet Models
Trace Precedents and Dependents
Show Formulas
Evaluate Formulas
Error Checking
Watch Window

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Auditing Spreadsheet Models

• Excel contains a variety of tools to assist you in the development and

debugging of spreadsheet models
• These tools are found in the Formula Auditing group of the Formulas
tab

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Auditing Spreadsheet Models

Trace Precedents and Dependents

• Trace Precedents button: After selecting cells, this button creates
arrows pointing to the selected cell from cells that are part of the
formula in that cell
• Trace Dependents button: Shows arrows pointing from the selected
cell to cells that depend on the selected cell
• Both of the tools are excellent for quickly ascertaining how parts of a
model are linked

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Figure 10.13: The Formula Auditing Group

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Figure 10.14: Trace Precedents for Foster
Generator

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Figure 10.15: Trace Dependents for the Foster
Generators Model

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Auditing Spreadsheet Models

Show Formulas
• To see the formulas in a worksheet, simply click on any cell in the
worksheet and then click on Show Formulas—you will see the
formulas residing in that worksheet
• To revert to hiding the formulas, click again on the Show Formulas
button

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Auditing Spreadsheet Models

Evaluate Formulas
• The Evaluate Formulas button allows you to investigate the
calculations of a cell in great detail
• Provides an excellent means of identifying the exact location of an
error in a formula

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Figure 10.16: The Evaluate Formula Dialog Box for
Gambrell Manufacturing

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Figure 10.17: The Evaluate Formula Dialog Box for
Gambrell Manufacturing Cell B17 after Four Clicks
of the Evaluate Button

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Auditing Spreadsheet Models

Error Checking
• The Error Checking button provides an automatic means of checking
for mathematical errors within formulas of a worksheet
• Clicking on the Error Checking button causes Excel to check every
formula in the sheet for calculation errors
• If an error is found, the Error Checking dialog box appears

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Figure 10.18: The Error Checking Dialog Box for a
Division by Zero Error

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Auditing Spreadsheet Models

Watch Window
• The Watch Window, located in the Formula Auditing group, allows
the user to observe the values of cells included in the Watch Window
box list
• Useful for large models when not all of the model is observable on
the screen or when multiple worksheets are used

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Figure 10.19: The Watch Window for Cell B17 of
the Gambrell Manufacturing Model

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