Statistics Data Analysis and Decision Modeling

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 Chapter 9 Decision Modeling and Analysis

Basic Concepts Review Questions

1. What is a decision model, and what are the three types of inputs common to decision models?

Answer:
A decision model is one that can be used to understand, analyze, or facilitate making a decision.
Decision models generally have three types of inputs:
a) Data, which are assumed to be constant for purposes of the model.
b) Uncontrollable variables, which are quantities that can change but cannot be directly controlled by the decision maker.
c) Decision variables, which are controllable and can be selected at the discretion of the decision maker.

2. Explain the difference between descriptive and prescriptive (optimization) models.

Answer:
Descriptive models describe relationships and provide information for evaluation.
Prescriptive models seek to determine an optimal policy.

3. Describe how to use Excel data tables, Scenario Manager, and goal seek tools to analyze decision models.

Answer:
Data tables summarize the impact of one or two inputs on a specified output.
The Excel Scenario Manager tool allows you to create scenarios – sets of values that are saved and can be substituted automatically on your
worksheet
If you know the result that you want from a formula, but are not sure what input value the formula needs to get that result, use Goal Seek.

4. Explain the purpose of Solver and what type of decision model it is used for.
Answer:
Solver allows you to find optimal solutions to optimization problems formulated as spreadsheet models.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-01
 5. Describe the reasons why a manager might use a heuristic instead of an optimization algorithm.

Answer:
Some models are so complex that it is impossible to solve them optimally in a reasonable amount of computer time because of the extremely
large number of computations that may be required or because they are so complex that an optimal solution cannot be guaranteed. In
addition, some models have such high data uncertainty it may not be worth the concentrated effort to find an optimal solution. For these
cases, a heuristic algorithm may be more appropriate.
Heuristics are solution procedures that generally find good solutions without guarantees of finding an optimal solution.

6. Summarize the important knowledge that you need to successfully build good decision models.

Answer:
Logic and business principles - Building good decision models requires a solid understanding of basic business principles in all functional
areas (such as accounting, finance, marketing, and operations), knowledge of business practice and research, and logical skills
Common mathematical functions - such as linear, logarithmic, polynomial, power, and exponential functions & their common use in
modeling
Data fitting - of the functions listed above
Spreadsheet engineering - Improve the design and format of the spreadsheet, improve the process used to develop it, and inspect your
results carefully using the appropriate tools available in Excel

7. Explain basic spreadsheet engineering approaches for implementing decision models in Excel.

Answer:
a) Improve the design and format of the spreadsheet itself.
b) Improve the process used to develop a spreadsheet.
c) Inspect your results carefully and use appropriate tools available in Excel.

8. What does validity mean? How does it differ from verification? What issues must an analyst consider in building realistic models?

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-02
 Answer:
Validity refers to how well a model represents reality whereas verification is the process of ensuring that a model is accurate and free from
logical errors. It is impossible to include every detail of real life in one model. To add more realism to a model generally requires more
complexity and analysts have to know how to balance these. Analysts must pay careful attention to the assumptions made when building
models and developing spreadsheet formulas.

9. Provide some examples of how you might use decision models in your personal life or in the context of current or prior work experience.

Answer:
Answers will vary. Students should be encouraged to think creatively on how decision models might apply to real situations they face. Most
will suggest things like buying a house or car, choosing financing, making investments, choosing players for fantasy sports, and many other
specific work-related projects.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-03
 Problems and Applications

1. A supermarket has been experiencing long lines during peak periods of the day. The problem is noticeably worse on certain days of the
week, and the peak periods are sometimes different according to the day of the week. There are usually enough workers on the job to open
all cash registers. The problem is knowing when to call some of the workers stocking shelves up to the front to work the checkout counters.
How might decision models help the supermarket? What data would be needed to develop these models?

Answer:
Supermarket

This is simply a discussion question to engage students in thinking about decision models.
It was based on a project in which the author was involved many years ago.
One large grocery chain was investigating the use of a laser‑based scanner at the doors of the store to count arriving and departing
customers. Company managers wanted to use this information to forecast demand at the checkout counters about 30 minutes in the future to
make staffing adjustments before long lines developed. Customers enter the store, shop, wait in line at one of several checkout counters, and
then leave the store.
The uncertainty in arrival rates at the checkout counters is due to not knowing how long customers will shop.
A forecasting model was developed on the assumption that the demand for checkout services is related closely to the number of shoppers in
the store; the larger the population of shoppers, the larger will be the demand for checkout services.
If the probability distribution of shopping times is relatively stable, the number of customers demanding checkout service will be
proportional to the number of customers in the store.
Over one‑week period, data on store arrivals, departures, lengths of checkout lines, and the number of cashiers working at the end of fixed
time intervals were collected. In effect, these provided "snapshots" of the state of the store over time. By keeping a running total of arrivals
less departures, the store could calculate the number of customers in the store at any time.

From the arrival and departure data, a variable representing check-out service demand in any given period was created as follows.
y = number of customers demanding checkout service during a time period,
Q = number of customers in line at the end of the period,
C = number of checkers working at the end of the period, andd = number of departures during a time period.

An estimate of the demand during a given period is then given by

y= d + Q + C.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-04
 The rationale for this equation is that the demand is equal to the number of departures (people who actually obtained service), plus the
number waiting to be served (current demand), plus the number of checkers (assuming that all are busy). The data suggested that regression
models might work extremely well.
The choice of prediction variables was determined by intuition, the strong relationships suggested by the data, and by extensive analysis of
certain statistical measures of model adequacy. The model that was ultimately developed used y t+3− that is, the demand three time periods
into the future as the dependent variable, with the following independent variables:
Nt = number of customers in the store in period t
Nt-1 = number of customers in the store in period t–1
at = number of customers arriv-ing in period t
An example of the actual model for one day is
Yt+3 = 0.34431 – 0.12760Nt + 0.31627Nt-1 + 0.90634at

2. Four key marketing decision variables are price (P), advertising (A), transportation (T), and product quality (Q). Consumer demand (D) is
influenced by these variables. The simplest model for describing demand in terms of these variables is:
D = k – pP + aA + tT + qQ
where k, p, a, t, and q are constants. Discuss the assumptions of this model. Specifically, how does each variable affect demand? How do the
variables influence each other? What limitations might this model have? How can it be improved?

Answer:
Demand model

➢ The assumptions of this model are that the variables have a linear relationship with demand.
➢ All of the factors have a positive effect on demand except price (assuming, of course, the constants k, p, a, t, and q are positive or
zero).
➢ Because each term only has one variable, each is independent of the others.
➢ The constants represent the rate by which an increase in a variable affects demand.
➢ It might be improved by examining data to determine if the relationships are indeed linear or whether nonlinear terms should be
used.
➢ One might also determine if the independent variables affect each other.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-05
 3. Total marketing effort is a term used to describe the critical decision factors that affect demand: price, advertising, distribution, and
product quality. Define the variable x to represent total marketing effort. A typical model that is used to predict demand as a function of total
marketing effort is based on the power function: D = axb
Suppose that a is a positive number. Different model forms result from varying the constant b. Sketch the graphs of this model for b = 0, b =
1, 0< b<1, b<0, and b>1. (We encourage you to use Excel to do this.) What does each model tell you about the relationship between demand
and marketing effort? What assumptions are implied? Are they reasonable? How would you go about selecting the appropriate model?

Answer:
Marketing Effort Function

Students should use line charts with various values of the parameters. The example below allows you to change the values of a and b and
see the chart.

a= 2 b = 0.5
x D

1 2
2 2.828427125
3 3.464101615
4 4
5 4.472135955
6 4.898979486
7 5.291502622
8 5.656854249
9 6
10 6.32455532

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-06
 b = 0:

b = 0 results in a horizontal line through a on the y-axis, meaning that demand is constant for any value of marketing effort (not reasonable
in the vast majority of cases.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-07
 b = 1:

b = 1 results in a straight line with a slope of a, so demand increases proportionately with marketing effort (probably reasonable within most
normal limits).

b = 0.25: b = 0.75:

0 < b < 1 results a curved line that is concave down,

indicating that as marketing effort increases, demand increases but at a decreasing rate.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-08
 b = -1:

b < 0 is a curve that is concave up and approaches the x-axis, indicating that higher levels of marketing effort lead to smaller demands
(probably not a good model!).

b > 1:
09-06

b > 1 results in a graph that increases very rapidly in an exponential fashion, so demand increases rapidly for increases in marketing effort.

It is likely that each of these models would work reasonably well for certain scenarios or scales but not for others. For example, the b = 1
model is probably fine for examining small changes in a current marketing effort, such as increasing TV commercial frequency by 10% but
not adequately model the effects for very large changes in what is more typically a nonlinear response (e.g. over saturation).

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-09
 4. A manufacturer is preparing to set the price on a new action game. Demand is thought to depend on the price and is represented by the
model: D = 2,000 – 3.5P
The accounting department estimates that the total costs can be represented by:
C = 5,000 + 4.1D
a. Develop a model for the total profit and implement it on a spreadsheet.
b. Develop a one-way data table to evaluate profit as a function of price (choose a price range that is reasonable and appropriate).
c. Use Solver to find the price that maximizes profit.

Answer:

Action Game Profit Model

Price $100.00
Demand $1,650.00
Total costs $11,765.00
Revenue $1,65,000.00
Profit $1,53,235.00

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-10
 Data table Price Profit
$1,53,235.00
$60.00 $95,061.00
$80.00 $1,25,548.00
$100.00 $1,53,235.00
$120.00 $1,78,122.00
$140.00 $2,00,209.00
$160.00 $2,19,496.00
$180.00 $2,35,983.00
$200.00 $2,49,670.00
$220.00 $2,60,557.00
$240.00 $2,68,644.00
$260.00 $2,73,931.00
$280.00 $2,76,418.00
$300.00 $2,76,105.00
$320.00 $2,72,992.00
$340.00 $2,67,079.00
$360.00 $2,58,366.00

Solver solution:
Price $287.76
Demand $992.83
Total costs $9,070.58
Revenue $2,85,699.58
Profit $2,76,628.99

09-11
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.
5. The Radio Shop sells two popular models of portable sport radios: model A and model B. The sales of these products are not independent of
each other (in economics, we call these substitutable products, because if the price of one increases, sales of the other will increase). The store
wishes to establish a pricing policy to maximize revenue from the products. A study of price and sales data shows the following relationships
between the quantity sold (N) and prices (P) of each model:
NA = 20 – 0.62PA + 0.30PB
NB = 29 + 0.10PA – 0.60PB

a. Construct a model for the total revenue and implement it on a spreadsheet.

b. Develop a two-way data table to estimate the optimal prices for each product in order to maximize the total revenue.
c. Use Solver to find the optimal prices.

Answer:

Radio Shop

Price Demand Revenue

Model A $10.00 $22.80 $228.00
Model B $30.00 $12.00 $360.00
Total $588.00

09-12
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.
 Data Price B
Table
$588.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
$5.00 $225 $335 $415 $465 $485 $475 $435 $365 $265 $135 $(26)
$10.00 $288 $408 $498 $558 $588 $588 $558 $498 $408 $288 $138
$15.00 $321 $451 $551 $621 $661 $671 $651 $601 $521 $411 $271
Price A $20.00 $322 $462 $572 $652 $702 $722 $712 $672 $602 $502 $372
$25.00 $293 $443 $563 $653 $713 $743 $743 $713 $653 $563 $443
$30.00 $232 $392 $522 $622 $692 $732 $742 $722 $672 $592 $482
$35.00 $141 $311 $451 $561 $641 $691 $711 $701 $661 $591 $491
$40.00 $18 $198 $348 $468 $558 $618 $648 $648 $618 $558 $468
$45.00 $(136) $55 $215 $345 $445 $515 $555 $565 $545 $495 $415

Solver solution:
Price Demand Revenue
Model A $26.81 $13.31 $356.81
Model B $33.10 $11.82 $391.25
Total $748.06
Solver solution:
Price Demand Revenue
Model A $26.81 $13.31 $356.81
Model B $33.10 $11.82 $391.25
Total $748.06

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-13

 6. A forest fire is burning down a narrow valley three miles wide at a speed of 40 feet per minute. The fire can be contained by cutting a
firebreak through the forest across the valley. It takes 30 seconds for one person to clear one foot of the firebreak. The value of lost timber is
$4,000 per square mile. Each person hired is paid $18 per hour, and it costs $50 to transport and supply each person with the appropriate
equipment.
a. Develop a model for determining how many people should be sent to contain the fire and for determining the best location for the
firebreak (draw a picture first!).
b. Implement your model on a spreadsheet and find the optimal solution using Solver.

Answer:
Forest Fire

Let F = number of fire fighters

Each F clears firebreak at the rate of ‘1 ft/30 sec’ or ‘2 ft/min’ or F people clear ‘2*F ft/min’

Firebreak cleared in T minutes where T = (3mi * 5280 ft/mi)/(2*F ft/min) = 7920/F min
Rearranging, F=7920/T

Let V = fire propagation speed = 40 ft/min = 40/5280 mi/min

Let D = distance fire travels to firebreak
D = V*T ft = 40 ft/min * T * mi/5280 ft = (40*7920)/(F*5280) mi = 60/F mi

Let A = area of forest burned during time T = width of valley*D

A = 3 mi*D = 3*60/F mi^2 = 180/F mi^2

Cost of timber burned = $4000/mi^2 * A = 720,000/F $

Labor cost = F*($18/hr * hr/60 min * T + $50) = .30F*7920/F + 50*F = 2376 + 50*F
= 2376+ 50*F
Will minimize costs when completion of firebreak occurs when fire reaches firebreak
(not practical for safety reasons but nonetheless adequate for this study)

Total cost = labor cost + cost of timber burned = 2376 +50F + 720,000/F

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-14
 F Total Cost ($) Break location (miles)
10 74,876 6.000
25 32,426 2.400
50 19,276 1.200
75 15,726 0.800
100 14,576 0.600
125 14,386 0.480
150 14,676 0.400
175 15,240 0.343
200 15,976 0.300
225 16,826 0.267
250 17,756 0.240
300 19,776 0.200
400 24,176 0.150
Solver Solution 120 14,376 0.500

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-15
 7. Each worksheet in the Excel file LineFit Data contains a set of data that describes a functional relationship between the dependent
variable y and the independent variable x. Construct a line chart of each data set, and use the Add Trendline tool to determine the best-fitting
functions to model these data sets.

Answer:
Data Set 1

x y
1 -102.8
1.5 -36.4
2 -4.7
2.5 -17.0
3 -5.3
3.5 -4.2
4 -1.5
4.5 -0.2
5 0.0
5.5 0.1
6 0.8
6.5 3.4
7 9.1
7.5 9.5
8 22.5
8.5 54.9
9 103.8
9.5 142.0
10 25.2
10.5 193.2

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-16

 Type R Square
Logarithmic 0.5439
Linear 0.642
2nd order Polynomial 0.6861
3rd order Polynomial 0.7828
Depending upon the use, it seems the 2nd or 3rd order polynomial will provide the “best fit.”

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-17
 Data Set 2

x y
10 16.04
10.5 13.46
11 13.46
11.5 11.70
12 13.36
12.5 11.74
13 10.63
13.5 11.05
14 11.35
14.5 10.04
15 11.14
15.5 11.04
16 11.31
16.5 10.56
17 10.89
17.5 9.00
18 8.18
18.5 8.71
19 7.41
19.5 7.62
20 5.13

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-18

 Type R Square
Exponential 0.7825
Linear 0.8266
2nd order Polynomial 0.8304
Power 0.6457
3rd order Polynomial 0.9238
Moving average period 2
Depending upon the use, it seems the 3rd order polynomial or moving average period 2 will provide the “best fit.”

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-19
 Data Set 3

x y
1 3.45
2 4.39
3 6.22
4 7.58
5 9.62
6 8.25
7 6.96
8 11.20
9 12.74
10 16.26
11 15.12
12 29.33
13 35.78
14 44.23
15 34.53
16 62.13
17 54.54
18 62.02
19 110.62

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-20
 Type R Square
Exponential 0.959
Linear 0.76
Polynomial 0.912
Power 0.8148
Depending upon the use, it seems the exponential will provide the “best fit”.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-21

 8. Develop a spreadsheet model to determine how much a person or a couple can afford to spend on a house. Lender guidelines suggest that
the allowable monthly housing expenditure should be no more than 28% of monthly gross income. From this, you must subtract total
nonmortgage housing expenses, which would include insurance and property taxes, and any other additional expenses. This defines the
affordable monthly mortgage payment. In addition, guidelines also suggest that total affordable monthly debt payments, including housing
expenses, should not exceed 36% of gross monthly income. This is calculated by subtracting total nonmortgage housing expenses and any
other installment debt, such as car loans, student loans, credit card debt, and so on, from 36% of total monthly gross income. The smaller of
the affordable monthly mortgage payment and the total affordable monthly debt payments is the affordable monthly mortgage. To calculate
the maximum that can be borrowed, find the monthly payment per $1,000 mortgage based on the current interest rate and duration of the
loan. Divide the affordable monthly mortgage amount by this monthly payment to find the affordable mortgage. Assuming a 20%
downpayment, the maximum price of a house would be the affordable mortgage divided by 0.8.
Use the following data to test your model: total monthly gross income = $6,500; nonmortgage housing expenses = $350; monthly
installment debt = $500; monthly payment per $1,000 mortgage = $7.258.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-22

 Answer:
Home Affordability

Data
Allowable monthly housing 28%
expenditure (AMHE) max % of
MGI
Monthly gross income (MGI) $6,500
Nonmortgage housing expenses $350
(e.g. insurance, property taxes,
etc)
Monthly installment debt $500
(e.g. car loans, student loans,
credit card debt)
Monthly payment per $1000 $7.258
mortgage
Affordable monthly debt 36%
payment (AMDP) max % of
MGI
Assumed downpayment % 20%

Model
Allowable monthly housing $1,820
expenditure (AMHE)
Amount available for a house $1,470
Affordable mortgage $2,02,535
AMHE approach maximum $2,53,169
house price

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-23
 Total debt payments $850
Amount available for a house $1,490
Affordable mortgage $2,05,291
Debt approach maximum house $2,56,613
price

Take smaller of two approaches

Maximum house price $2,53,169

9. Monthly rent at an apartment complex is $500. Operating costs average $15,000 per month regardless of the number of units rented.
Construct a spreadsheet model to determine the profit if 35 units are rented. The manager has observed that the number of units rented
during any given month varies between 30 and 40. Use your model to evaluate the profit for this range of unit rentals.

Answer:

Apartment Complex

Monthly rent at apartment complex $500.00

Monthly operating costs $15,000.00
Number apartments rented 35
Revenue $17,500.00
Profit $2,500.00

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-24
 Number units rented Profit
30 $ -
31 $500.00
32 $1,000.00
33 $1,500.00
34 $2,000.00
35 $2,500.00
36 $3,000.00
37 $3,500.00
38 $4,000.00
39 $4,500.00
40 $5,000.00

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-25
 10. Think of any retailer that operates many stores throughout the country, such as Old Navy, Hallmark Cards, or Radio Shack, to name just
a few. The retailer is often seeking to open new stores and needs to evaluate the profitability of a proposed location that would be leased for
five years. An Excel model is provided in the New Store Financial Model spreadsheet. Use Scenario Manager to evaluate the cumulative
discounted cash flow for the fifth year under the following scenarios:

Scenario 1 Scenario 2 Scenario 3

Inflation Rate 1% 5% 3%
Cost of Merchandise 25% 30% 26%
(% of sales)
Labor Cost $150,000 $225,000 $200,000
Other Expenses $300,000 $350,000 $325,000
First Year Sales $600,000 $600,000 $800,000
Revenue
Sales growth year 2 15% 22% 25%
Sales growth year 3 10% 15% 18%
Sales growth year 4 6% 11% 14%
Sales growth year 5 3% 5% 8%

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. 09-26

 Answer:

New Store Financial Analysis

Data

Store Size (square feet) 5,000

Total Fixed Assets $3,00,000
Depreciation period (straight 5
line)
Discount Rate 10%
Tax Rate 34%
Inflation Rate 2%
Cost of Merchandise (% of sales) 30%

Operating Expenses
Labor Cost $2,00,000
Rent Per Square Foot $28
Other Expenses $3,25,000

First Year Sales Revenue $8,00,000

Year 2 Year 3 Year 4 Year 5

Annual Growth Rate of Sales 20% 12% 9% 5%

Scenario Summary 1507.456062

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-27
1507.456062 Current Scenario1 Scenario 2
Values:
Changing Cells: 1507.456062
1507.456062 $B$10 2% 1% 5%
1507.456062 $B$11 30% 25% 30%
1507.456062 $B$14 $2,00,000 $1,50,000 $2,25,000
1507.456062 $B$16 $3,25,000 $3,00,000 $3,50,000
1507.456062 $B$18 $8,00,000 $6,00,000 $6,00,000
1507.456062 $D$20 20% 15% 22%
1507.456062 $E$20 12% 10% 15%
1507.456062 $F$20 9% 6% 11%
1507.456062 $G$20 5% 3% 5%
Result Cells: 1507.456062
1507.456062 $G$37 1,507.46 1,507.46 1,507.46

Model Year 1 2 3 4 5
Sales Revenue $8,00,000 $9,60,000 $12,30,566
$10,75,200 $11,71,968
Cost of $2,40,000 $2,88,000 $3,22,560 $3,51,590 $3,69,170
Merchandise
Operating
Expenses
Labor Cost $2,00,000 $2,04,000 $2,08,080 $2,12,242 $2,16,486
Rent Per Square $1,40,000 $1,42,800 $1,45,656 $1,48,569 $1,51,541
Foot
Other Expenses $3,25,000 $3,31,500 $3,38,130 $3,44,893 $3,51,790
Net Operating $(6,300) $60,774 $1,14,674 $1,41,579
Income $(1,05,000)
Depreciation $60,000 $60,000 $60,000 $60,000 $60,000
Expense
Net Income $(66,300) $774 $54,674 $81,579
Before Tax $(1,65,000)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-28
Income Tax $(56,100) $(22,542) $263 $18,589 $27,737
Net After Tax $(43,758) $511 $36,085 $53,842
Income $(1,08,900)
Plus $60,000 $60,000 $60,000 $60,000 $60,000
Depreciation
Expense
Annual Cash $(48,900) $16,242 $60,511 $96,085 $1,13,842
Flow
Discounted -44,454.55 13,423.14 45,462.69 65,627.36 70,687.05
Cash Flow
Cumulative -44,454.55 -31,031.40 14,431.28 80,058.65 1,50,745.70
Discounted
Cash Flow

CDCF
Baseline $ 1,50,746
Scenario 1 $ (1,82,764)
Scenario 2 $ (3,77,559)
Scenario 3 $ 3,20,815

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-29
 11. A garage band wants to hold a concert. The expected crowd is 3,000. The average expenditure on concessions is $15. Tickets sell for
$10 each, and the band’s profit is 80% of the gate, along with concession sales, minus a fixed cost of $10,000. Develop a spreadsheet model
to find their expected profit. Define and run some reasonable scenarios using the Scenario Manager to evaluate profitability for variations in
the estimates.

Answer:

Garage Band

Expected demand 3000

average concessions expenditure $15.00
Ticket cost $10.00
Fixed cost $10,000.00
Band's gate % 80%

Band's profit $59,000.00

Demand Average concessions expenditure

Euphoric case $4,600 $21.00
Best case $4,000 $18.50
Expected case $3,100 $14.75
Worst case $1,800 $11.00
Disaster case $250 $7.50

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

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 Scenario Summary
Current Euphoric Best Expected Worst Disaster
Values: case case case case case
Changing Cells:
$B$3 3000 4600 4000 3100 1800 250
$B$4 $15.00 $21.00 $18.50 $14.75 $11.00 $7.50
Result Cells:
$B$9 $59,000 $96,000 $60,525 $24,200
$1,23,400 $(6,125)

12. For a new product, sales volume in the first year is estimated to be 100,000 units and is projected to grow at a rate of 7% per year. The
selling price is $10, and will increase by $0.50 each year. Per-unit variable costs are $3, and annual fixed costs are $200,000. Per-unit costs
are expected to increase 5% per year. Fixed costs are expected to increase 10% per year. Develop a spreadsheet model to calculate the
present value of profit over a three-year period, assuming a 7% discount rate.
Answer:

New Product

Data
Sales volume 1st year 1,00,000
Sales growth %/yr 7%
Initial price $10.00
Price growth per year $0.50
Annual fixed costs $2,00,000.00
Fixed cost growth per year 10%
Variable cost per unit $3.00
Per unit cost growth /yr 5%
Discount rate 7%

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-31
 Model
Year 1 2 3
Sales volume 1,00,000 1,07,000 1,14,490
Price $10.00 $10.50 $11.00
Revenue $10,00,000 $11,23,500 $12,59,390
Fixed costs $2,00,000 $2,20,000 $2,42,000
Variable costs/unit $3.00 $3.15 $3.31
Variable costs $3,00,000 $3,37,050 $3,78,676
Annual Costs $5,00,000 $5,57,050 $6,20,676
Profit $5,00,000 $5,66,450 $6,38,714
Cumulative Net Profit $5,00,000 $10,66,450 $17,05,164
Present Value Net Profit $15,87,270

13. MasterTech is a new software company that develops and markets productivity software for municipal government applications. In
developing their income statement, the following formulas are used:
Gross profit = Net sales – Cost of sales
Net operating profit = Gross profit – Administrative expenses – Selling expenses
Net income before taxes = Net operating profit – Interest expense
Net income = Net income before taxes – Taxes
Net sales are expected to be $900,000. Cost of sales is estimated to be $540,000. Selling expenses has a fixed component that is estimated to
be $90,000, and a variable component that is estimated to be 7% of net sales. Administrative expenses are $50,000. Interest expenses are
$10,000. The company is taxed at a 50% rate. Develop a spreadsheet model to calculate the net income. Design your spreadsheet using good
spreadsheet engineering principles.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-32
 Answer:

MasterTech

Data
Income
Net sales $9,00,000

Expenses
Cost of sales $5,40,000
Selling expense, fixed $90,000
Selling expense, variable % 7%
Administrative expenses $50,000
Interest expenses $10,000
Tax rate 50.0%

Model
Selling expenses $1,53,000
Gross profit $3,60,000
Net operating profit $1,57,000
Net income before taxes $1,47,000
Net Income $73,500

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-33
 14. A local pharmacy orders 15 copies of a monthly magazine. Depending on the cover story, demand for the magazine varies. The
pharmacy purchases the magazines for $2.25 and sells them for $5.00. Any magazines left over at the end of the month are donated to
hospitals and other health care facilities. Investigate the financial implications of this policy if the demand is expected to vary between 5 and
15 copies each month.

Answer:
Data:
Demand
# copies ordered / month 15

Income
# magazines sold 10
Price per magazine $5.00

Expenses
Cost per magazine $2.25

Model
Revenue $50.00
Cost of magazines $33.75
Cost of non-sales $11.25
Net sales $16.25

Note: Anwer varies. This is because, the variable "Demand" is randomly selcted (using rand function)
Investigate implications of this policy if the demand is expected to vary between 5 and 15 copies per month.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

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 Averages: 10.054 $50.27 $16.52
Trial Demand Revenue Net sales
1 8 $40.00 $6.25
2 7 $35.00 $1.25
3 13 $65.00 $31.25
4 11 $55.00 $21.25
5 9 $45.00 $11.25
6 10 $50.00 $16.25
7 13 $65.00 $31.25
8 15 $75.00 $41.25
9 14 $70.00 $36.25
10 11 $55.00 $21.25
11 13 $65.00 $31.25
12 8 $40.00 $6.25
13 5 $25.00 -$8.75
14 11 $55.00 $21.25
15 7 $35.00 $1.25
16 15 $75.00 $41.25
17 9 $45.00 $11.25
18 11 $55.00 $21.25
19 10 $50.00 $16.25
20 15 $75.00 $41.25
21 7 $35.00 $1.25
22 11 $55.00 $21.25
23 15 $75.00 $41.25
24 12 $60.00 $26.25
25 7 $35.00 $1.25
26 12 $60.00 $26.25
27 9 $45.00 $11.25
28 8 $40.00 $6.25

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.

09-35
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