Question

Problem 16-01

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.
   
   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?
   
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