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Topic 9 Building Spreadsheet Models

The document outlines the process of building effective spreadsheet models, including the use of influence diagrams, mathematical modeling, and spreadsheet design principles. It discusses a case study involving Nowlin Plastics' decision to manufacture or outsource a product, employing what-if analysis and Excel functions for modeling. Additionally, it covers auditing techniques to ensure the accuracy of spreadsheet models.

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Phúc Kim
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4 views

Topic 9 Building Spreadsheet Models

The document outlines the process of building effective spreadsheet models, including the use of influence diagrams, mathematical modeling, and spreadsheet design principles. It discusses a case study involving Nowlin Plastics' decision to manufacture or outsource a product, employing what-if analysis and Excel functions for modeling. Additionally, it covers auditing techniques to ensure the accuracy of spreadsheet models.

Uploaded by

Phúc Kim
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Topic 9: Building Spreadsheet Models

Camn et al (2016), Chapter 10


1. Building good Spreadsheet Models
2. What-if analysis
3. Some useful Excel Functions for modeling
4. Auditing spreadsheet model
1.Building good Spreadsheet Models
Step 1: Influence diagram
◦ The conceptual model helps in organizing the data requirements and provides a road map for
eventually constructing a mathematical model. A conceptual model also provides a clear way to
communicate the model to others.
◦ An influence diagram is a visual representation of which entities influence others in a model.

Step 2: Building a mathematical model


◦ use the influence diagram to build a mathematical model.

Step 3: Spreadsheet design and implementing the model in a spreadsheet


The general principles of spreadsheet model design and construction are:
◦ Separate the parameters from the model.
◦ Document the model, and use proper formatting and color as needed.
◦ Use simple formulas.
Building good Spreadsheet Models
Case: Nowlin
• Nowlin Plastics produces a line of cell phone covers. Nowlin’s best-selling cover is its Viper
model, a slim but very durable black and gray plastic cover. The annual fixed cost for the Viper
cover is $234,000. This fixed cost includes management time and other costs that are incurred
regardless of the number of units eventually produced. In addition, the total variable cost,
including labor and material costs, is $2 for each unit produced.
• Nowlin is considering outsourcing the production of some products for next year, including the
Viper. Nowlin has a bid from an outside firm to produce the Viper for $3.50 per unit. Although it is
more expensive per unit to outsource the Viper ($3.50 versus $2.00), the fixed cost can be
avoided if Nowlin purchases rather than manufactures the product. Next year’s exact demand for
Viper is not yet known. Nowlin would like to compare the costs of manufacturing the Viper in-
house to those of outsourcing its production to another firm, and management would like to do
that for various production quantities.
• Many manufacturers face this type of decision, which is known as a make-versus-buy decision .
Case: Nowlin
Step 1: Influence
diagram
• Nowlin’s decision problem is
whether to manufacture or
outsource the demand for its
Viper product next year.
• Because management does
not yet know the required
demand, the key question is,
“For what quantities is it
more cost-effective to
outsource rather than
produce the Viper?”
Case: Nowlin
Step 2: Building a mathematical model
Case: Nowlin
Step 3: Spreadsheet design and implementing the
model in a spreadsheet
• Parameters: uncontrollable inputs to the
model
◦ FC, VC, and P are measurable factors that
define characteristics of the process we are
modeling and so are uncontrollable inputs to
the model, which we refer to as parameters
of the model.
• Decision variable: the value we can control or
choose
◦ Quantity q
2. What-if analysis
• Data table quantities the impact of changing the value of a specific
input on an output of interest.
◦ a one-way data table , which summarizes a single input’s impact on the output,
or
◦ a two-way data table , which summarizes two inputs’ impact on the output.

• Goal Seek tool 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).
2. What-if analysis
Case: Nowlin
• For which values of q is outsourcing more cost-effective?
• How could the analysis change when Nowlin has now received five
different bids on the per-unit cost for outsourcing the production of
the Viper?
• What is the quantity at which Nowlin would be indifferent to
manufacturing and outsourcing?
For which values of q
is outsourcing more
cost-effective?

Construct
a one-way data table
For which values of q
is outsourcing more
cost-effective?
In the case of five
different bids on the
per-unit cost for
outsourcing

Construct
a two-way data table
For which values of q
is outsourcing more
cost-effective?
In the case of five
different bids on the
per-unit cost for
outsourcing

Output:
a two-way data table
What is the
quantity at which
Nowlin would be
indifferent to
manufacturing and
outsourcing?

Using Goal Seek


3. Some useful Excel Functions for modeling
• SUM and SUMPRODUCT
• IF and COUNTIF
• VLOOKUP
3. Some useful Excel Functions for modeling
• SUM and SUMPRODUCT
3. Some useful Excel Functions for modeling
• IF and COUNTIF

• VLOOKUP
Practice: Gambrell
• Gambrell Manufacturing produces car stereos. Stereos are composed of a variety of
components that the company must carry in inventory to keep production running smoothly.
However, because inventory can be a costly investment, Gambrell generally likes to keep its
components inventory to a minimum. To help monitor and control its inventory, Gambrell uses
an inventory policy known as an order-up-to policy . The order-up-to policy is as follows.
• Whenever the inventory on hand drops below a certain level, enough units are ordered
to return the inventory to that predetermined level.
• Depending on the number of units ordered, Gambrell receives a discount on the cost per unit.
If 50 or more units are ordered, there is a quantity discount of 10% on every unit purchased.
• Let’s build a spreadsheet model to calculate: Total number of Orders; Total cost
Practice: Granite
• The director of sales at Granite Insurance needs to award bonuses to her sales force
based on performance. There are 15 salespeople, each with his or her own territory.
Based on the size and population of the territory, each salesperson has a sales target
for the year.
• The measure of performance for awarding bonuses is the percentage achieved above
the sales target. Based on this metric, a salesperson is placed into one of five bonus
bands and awarded bonus points.
• After all salespeople are placed in a band and awarded points, each is awarded a
percentage of the bonus pool, based on the percentage of the total points awarded.
• Let’s help the sales director create a spreadsheet model to calculate the bonuses to
be awarded. The bonus pool is $250,000 for this year.
4. Auditing spreadsheet model
• The Formula Auditing Group

Let check the model for Gambrell and Granite


Trace precedents
• The Trace Precedents
button creates arrows
pointing to the selected
cell from cells that are
part of the formula in that
cell..
Trace dependents
• The Trace Dependents
button shows arrows
pointing from the
selected cell to cells
that depend on the
selected cell
Evaluate
Formula
• The Evaluate
Formula button
allows you to
investigate the
calculations of a
cell in great
detail.
Error Checking
• The Error Checking
button provides an
automatic means of
checking for
mathematical errors
within formulas of a
worksheet.
Watch Window
• The Watch Window allows the user to observe the values of cells
included in the Watch Window box list.
• The Watch Window is observable regardless of where we are in
any worksheet of a workbook.

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