ITIS461-ITIS361

Modeling and Sensitivity Analysis Exercises

What-If Analysis Data Tables, Goal Seek, and Scenario Manager

Exercise-1:
Ahmed is thinking of starting a store to sell gourmet lemonade in the local mall. Before opening
the store, he is curious about how his profit, revenue, and variable costs will depend on the price
he charges and the unit variable cost.
• The price for which a glass of lemonade is sold is $ 4.00.
• The variable cost of producing a glass of lemonade is $ 1.5.
• The sensitivity of demand for lemonade to price charged 30,000.
• The annual fixed cost of running a lemonade stand is equal to $ 25,000.

Questions:
1) Carry through the three stages of logical modeling and develop a spreadsheet model to
calculate Revenue, Total Cost and Profit.
a. Classify the modeling factors / variables as Input factor, calculated variable, and
intermediate variable.
b. Identify the managerial variables Decision variables, output variables, and environmental
variables.
c. Identify which of the formulas are linear and which are non- linear.
d. Which variable can be uncertain variable?
2) Then Determine how changes in price (say, between $2.00 and $5.00 in $0.25 increments)
affect:
a. Revenue.
b. Total Variable cost.
c. Profit.
3) Determine how annual profit varies as price varies from $2 to $5 (in $0.25 increments) and
unit variable cost varies from $1.20 to $1.80 (in $0.10 increments).
a. If the minimum profit Ahmed expects to make from his investment is $50,000, Then
what are the possible ranges of price and cost.
b. Determine how $10,000 increases in fixed cost will affect the profit.
4) How many glasses of lemonade does a lemonade store need to sell per year to earn $70,000
profit?
5) How much should be the price for a glass of lemonade to earn $70,000 profit?
6) How match should be the cost per unit to minimize total cost. Knowing that the cost per
unit should be between $1 and $2.

Amna Khalifa
ITIS461-ITIS361

7) How match should be the price unit to maximize the revenue. Knowing that price per should
be at most $6.
8) How match should be the price and cost per unit to have profit equal to $100,000.
9) Try to maximize the profit when the price is at least $2 and at most $5 and cost per unit is at
least $1.2 and at most $1.8.

Exercise 2
A bakery shop sells Chocolate Truffles. The bakery makes 1500 Chocolate Truffle and sells 1200
Chocolate Truffle. The selling price is £ 1.75 per Chocolate Truffle. The material cost is £ 0.25
per Chocolate Truffle and the labor cost per unit is equal to £ 0.5. The total fixed cost is
budgeted at £ 500.

1. Carry through the three stages of logical modeling and drive a spreadsheet model to
calculate Revenue, Total Cost and Profit.

2. Classify the modeling factors / variables as Input factor, calculated variable, and
intermediate variable.

3. Identify the managerial variables Decision variables, output variables, and environmental
variables.

4. Identify which of the formulas are linear and which are non- linear.

5. Which variable can be uncertain variable?

6. If the bakery can increase the price by maximum %15, Can the bakery reach the profit of
£ 900? If not, how many units they should sell.

7. If the unit sold should be at least 50% of unit made and at most 100% of unit made, how
much the bakery should sell to get a profit of £ 900.

8. If the manager decided not to produce in advance, they will produce only the needed
units. Can the company reach the profit of £ 900? If not, how much they should set the
price to get a profit of 900.

9. What will be the profit if the demand increased between 1200 to 2000? Explain the
relationship between the demand and profit.

10. Identify the impact of the following changes in the price and demand on the profit.
Where price can be increased from %5 to %25 and demand can be increased between
1200 to 2000.

Amna Khalifa
ITIS461-ITIS361

Exercise 3
The owner of the shop in Exercise 1 introduced a new type of Truffles “Pistachio”. The owner of
the shop wants to know which product should be marketed more actively. Therefore, he must
discover which product has the lower contribution margin ratio.

The bakery sells 900 Pistachio Truffles. The selling prices is £ 2.25 per Pistachio Truffle. The
material cost is £ 0.5 per Pistachio Truffle. The bakery decided to make his production equal to
demand.

1. Carry through the three stages of logical modeling and drive a spreadsheet model to find
which product should be marketed more actively (lower contribution margin ratio).
Knowing that the contribution margin ratio is the difference between Total Revenue and
Total variable costs divided by Total Revenue.

2. Classify the modeling factors / variables as Input factor, calculated variable, and
intermediate variable.

3. Identify the managerial variables Decision variables, output variables, local environmental
variables and remote environmental variables.

4. What would be the new Pistachio Truffle price per unit if the manager wants to increase
the contribution margin ratio equal to 65%?

Amna Khalifa