Question

Monte Carlo Simulation

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:

Tully Tyres
Data
Probability	Cumulative probability	Demand		Selling price	$160	$180
0.05		100		Monthly fixed cost	$2000
0.1		120		Profit margin	20%	30%
0.2		140
0.3		160
0.25		180
0.1		200
1
Model
Month	Random number1	Demand	Selling price	Random number 2	Profit margin	Fixed cost	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 Tully 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

03 Sept 2017

To,

The Manager

The monte carlo reproduction is set up according to the offered parameters to figure the normal month to month benefit.

Here an interest dissemination given, the normal month to month benefit for a time of a year is processed with an overall revenue running between 20% to 30%. The normal month to month benefit works out to be is $917.

Here, increment in offering cost and increment in net revenue with the end goal that new offering costs will extend between $80 to $100 and net revenue between 22% to 32%, the normal month to month benefit progresses toward becoming $1496.

A noteworthy presumption is that the interest appropriation stays consistent even with an expansion in cost. Such a supposition might be imperfect similarly as with increment in cost, there is bound to certain interest decimation as affinity to buy of purchasers will diminish with an expansion of cost.

Respects

Jonathan Smith.