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SSM Microsoft Word - Problem Set 01

This document outlines four problems to model in spreadsheets regarding pricing, advertising budget, woodworking shop operations, and a food processing company. For each problem, it provides context and instructions to draw influence diagrams, black box diagrams, design the spreadsheet layout, and build the base case model. The problems involve making decisions around pricing, advertising spending, procurement quantities, and sales negotiations to maximize profits.

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Second Floor
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98 views

SSM Microsoft Word - Problem Set 01

This document outlines four problems to model in spreadsheets regarding pricing, advertising budget, woodworking shop operations, and a food processing company. For each problem, it provides context and instructions to draw influence diagrams, black box diagrams, design the spreadsheet layout, and build the base case model. The problems involve making decisions around pricing, advertising spending, procurement quantities, and sales negotiations to maximize profits.

Uploaded by

Second Floor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem Set 01: Basics of Spreadsheet Modelling

(Influence Diagrams, Black Box Diagrams, Spreadsheet Layout, Building


Basic Models)
1. Pricing Decision
Determine the price we should set for our product for the coming year. Draw the
influence diagram and the black box diagram for this problem.

2. The Advertising Budget Decision


As product-marketing manager, one of our jobs is to prepare recommendations to
the Executive Committee as to how advertising expenditures should be allocated.
Last year’s advertising budget of $40,000 was spent in equal increments over the
four quarters. Initial expectations are that we will repeat this plan in the coming year.
However, the committee would like to know whether some other allocation would
be advantageous and whether the total budget should be changed.
Our product sells for $40 and costs us $25 to produce. Sales in the past have been
seasonal and our consultants have estimated seasonal adjustment factors for unit
sales as follows:
Q1: 90%; Q2: 110%; Q3: 80%; Q4: 120%
(A seasonal adjustment factor measures the percentage of average quarterly demand
experienced in a given quarter.)
In addition to production costs, we must take into account the cost of the sales force
(projected to be $34,000 over the year, allocated as follows: Q1 and Q2, $8,000 each;
Q3 and Q4, $9,000 each), the cost of advertising itself, and overhead (typically
around 15% of revenues). Clearly, advertising will increase sales, but there are limits
to its impact. Our consultants several years ago estimated the relationship between
advertising and sales. Converting that relationship to current conditions gives the
following formula:

𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 35 × 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 × (3,000 + 𝐴𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔)


a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the layout of the spreadsheet model for this problem.
c. Build the base case spreadsheet model to help make the decision.
3. Bob’s Woodworking Shop
Bob owns a woodworking shop where he builds picnic tables and Muskoka chairs.
He charges $250 for each picnic table and $80 for each Muskoka chair. It costs him
$105 in materials and $50 in labour to build a picnic table. It costs him $30 in
materials and $30 in labour to build a Muskoka chair. Demand for picnic tables is
relatively constant at 30 tables per summer season. Demand for Muskoka chair
increases with his investment in advertising. Based on his past experience, he
believes that the relationship between advertising and demand for Muskoka chairs
is as follows:
125
𝐷𝑒𝑚𝑎𝑛𝑑 =
1 + 5𝑒 . ×
Bob wants to decide how much he should invest in advertising.
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the model design for this problem.
c. Build a spreadsheet model. You can use the base case advertising spend to be
$100.

4. Honeydukes Co.
Honeydukes Co. is a food-processing firm that purchases surplus grapes from grape
growers, dries them into raisins, applies a layer of sugar, and sells the sugar-coated
raisins to major cereal and candy companies. At the beginning of the grape-growing
season, Honeydukes has two decisions to make: 1) how many grapes to buy under
contract and 2) how much to charge for the sugar-coated raisins it sells.
In the spring, Honeydukes typically contracts with a grower who will supply a given
amount of grapes in the autumn at a fixed cost of $0.25 per pound. The balance
between Honeydukes’ grapes requirements and those supplied by the grower must
be purchased in the autumn in the open market at a price that could vary between
$0.25 per pound to $0.35 per pound. Honeydukes, however, cannot sell grapes on
the open market in autumn if it has a surplus in inventory because it has no
distribution system for such purposes.
The other major decision facing Honeydukes is the price to charge for sugar-coated
raisins. Honeydukes has several customers who buy its output in price-dependent
quantities. Honeydukes negotiates with these processors as a group to arrive at a
price for the sugar-coated raisins and the quantity to be bought at that price. The
negotiations happen in spring, long before open market price of grapes is known.
Based on experience, Ambrosius Flume, Honeyduke’s general manager, believes
that if Honeydukes prices the sugar-coated raisins at $2.20 per pound, the
processors’ orders will total 750,000 pounds of sugar-coated raisins. This total will
increase by 15,000 pounds for each penny reduction in sugar-coated raisin price
below $2.20. The same relationship holds in the other direction: demand will drop
by 15,000 for each penny increase. The price of $2.20 is a tentative starting point in
the negotiation.
Sugar-coated raisins are made by washing and drying grapes into raisins, followed
by spraying the raisins with a sugar coating that Honeydukes buys for $0.55 per
pound. It takes 2.5 pounds of grapes and 0.05 pound of coating to make one pound
of sugar-coated raisins, the balance being water that evaporates during grape drying.
In addition to the raw material cost for the grapes and the coating, Honeydukes’
processing plant incurs a variable cost of $0.20 to process one pound of grapes into
raisins, up to its capacity of 1,500,000 pounds of grapes. For volumes above
1,500,000 pounds of grapes, Honeydukes outsources grapes processing to another
food processor which charges $0.45 per pound. This price includes just the
processing cost, as Honeydukes supplies both the grapes and the coating required.
Honeydukes also incurs fixed costs in its grape-processing plant of $200,000 per
year.
Ambrosius Flume has asked you to analyze the situation to guide him in the
upcoming negotiations. His ultimate goal is to examine the effect of various
scenarios on Honeydukes’ profits. As a basis for further analysis, he suggests using
a contract purchase price of $0.25 with a supply quantity of 1 million pounds from
the grower, along with a selling price of $2.20 for sugar-coated raisins. He is mainly
interested in evaluating annual profit (before taxes). He believes that the open-
market grape price will most likely be $0.30.
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the layout of the spreadsheet model for this problem.
c. Build the base case spreadsheet model to help Ambrosius Flume.

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