Question

The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for a new product. The selling price for the product will be $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows:

Procurement Cost ($)	Probability	Labor Cost ($)	Probability	Transportation Cost ($)	Probability
10	0.25	20	0.10	3	0.75
11	0.45	22	0.25	5	0.25
12	0.30	24	0.35
		25	0.30

1. Compute profit per unit for the base-case, worst-case, and best-case scenarios.
   
   Profit per unit for the base-case: $  
   
   Profit per unit for the worst-case: $  
   
   Profit per unit for the best-case: $  
2. Construct a simulation model to estimate the mean profit per unit. If required, round your answer to the nearest cent.
   
   Mean profit per unit = $  
3. Why is the simulation approach to risk analysis preferable to generating a variety of what-if scenarios?
   
   The input in the box below will not be graded, but may be reviewed and considered by your instructor.
   
   
4. Management believes the project may not be sustainable if the profit per unit is less than $5. Use simulation to estimate the probability the profit per unit will be less than $5. If required, round your answer to two decimal places.
   
   %

Answer 1

1) Profit per unit for base-case:

Profit = Selling Price - Purchase Cost - Labor Cost - Transportation Cost

= 45 - 11 - 24 - 3 = $7/unit

Profit per unit for worst case:

Profit = 45 - 12 - 25 - 5 = $3/unit

Profit per unit for best-case:

Profit = 45 - 10 - 20 - 3 = $12/unit

b) Mean of purchase cost = 10+11+12 /3 = 11

Mean of labor cost = 20 + 22 + 24 + 25 / 4 = 22.75

Mean of transportation cost = 8/2 = 4

Profit = 45 - 11 - 22.75 - 4 = $7.25/unit

c) Simulation will provide a distribution of the profit per unit values. It will also show probability information on multiple possibilities at the profit level. Therefore, Simulation approach to risk analysis is preferred in generating a variety of what-if scenarios

answer d

Simulation will provide a distribution of the profit per unit values. Calculating the percentage of simulation trials providing a profit less than $5 per unit would provide an estimate of the probability the profit per unit will be unacceptably low.

if purchase cost labour cost and transporattion cost will be 11, 12 or 24, 25 or 5 respectively tan in these cases profit will be less than 5