Question

uide to marks: 20 marks – 12 for a, 2 for b, 6 for c

Tully Tyres sells cheap imported tyres. The manager believes its profits are in decline. You have just been hired as an analyst by the manager of Tully Tyres to investigate the expected profit over the next 12 months based on current data.

•Monthly demand varies from 100 to 200 tyres – probabilities shown in the partial section of the spreadsheet below, but you have to insert formulas to ge the cumulative probability distribution which can be used in Excel with the VLOOKUP command.
•The average selling price per tyre follows a discrete uniform distribution ranging from $160 to $180 each. This means that it can take on equally likely integer values between $160 and $180 – more on this below.
•The average profit margin per tyre after covering variable costs follows a continuous uniform distribution between 20% and 30% of the selling price.
•Fixed costs per month are $2000.

(a)Using Excel set up a model to simulate the next 12 months to determine the expected average monthly profit for the year. You need to have loaded the Analysis Toolpak Add-In to your version of Excel. You must keep the data separate from the model. The model should show only formulas, no numbers whatsoever except for the month number.

You can use this partial template to guide you:

Ajax Tyres
DATA
Prob	Cummulative prob	Demand		Selling	Price	$160	$180
0.05		100		Monthly	Fixed cost	$2,000
0.10		120		Profit	Margin	20%	30%
0.20		140
0.30		160
0.25		180
0.10		200
1.00
MODEL
			Selling		Profit	Fixed
Month	RN1	Demand	Price	RN2	Margin	Costs	Profit
1	0.23297	#N/A	$180	0.227625	0.2

The first random number (RN 1) is to simulate monthly demands for tyres.
•The average selling price follows a discrete uniform distribution and can be determined by the function =RANDBETWEEN(160,180) in this case. But of course you will not enter (160,180) but the data cell references where they are recorded.
•The second random number (RN 2) is used to help simulate the profit margin.
•The average profit margin follows a continuous uniform distribution ranging between 20% and 30% and can be determined by the formula =0.2+(0.3-0.2)*the second random number (RN 2). Again you do not enter 0.2 and 0.3 but the data cell references where they are located. Note that if the random number is high, say 1, then 0.3-0.2 becomes 1 and when added to 0.2 it becomes 0.3. If the random number is low, say 0, then 0.3-0.2 becomes zero and the profit margin becomes 0.2.
•Add the 12 monthly profit figures and then find the average monthly profit.

Show the data and the model in two printouts: (1) the results, and (2) the formulas. Both printouts must show the grid (ie., row and column numbers) and be copied from Excel and pasted into Word. See Spreadsheet Advice in Interact Resources for guidance.

(b)Provide the average monthly profit to Ajax Tyres over the 12-month period.

(c)You present your findings to the manager of Ajax Tyres. He thinks that with market forces he can increase the average selling price by $40 (ie from $200 to $220) without losing sales. However he does suggest that the profit margin would then increase from 22% to 32%.

He has suggested that you examine the effect of these changes and report the results to him. Change the data accordingly in your model to make the changes and paste the output in your Word answer then write a report to the manager explaining your conclusions with respect to his suggestions. Also mention any reservations you might have about the change in selling prices.

The report must be dated, addressed to the Manager and signed off by you.
(Word limit: No more than 150 words)

Answer 1

The average monthly profit is $917.

With change in price and profit margin and demand remaining constant, the average profit increases to $1496

03 Sept 2017

To,

The Manager

The monte carlo simulation is set up as per the given parameters to calculate the average monthly profit.

With a demand distribution given, the average monthly profit for a period of 12 months is computed with a profit margin ranging between 20% to 30%. The average monthly profit works out to be $917.

With an increase in selling price and increase in profit margin such that new selling prices will range between $80 to $100 and profit margin between 22% to 32%, the average monthly profit becomes $1496.

A major assumption is that the demand distribution remains constant even with an increase in price. Such an assumption may be flawed as with increase in price, there is bound to certain demand destruction as propensity to purchase of consumers will decrease with an increase of price.