Problem 12-14 (Algorithmic) The management of Madeira Manufacturing Company is c
ID: 2907105 • Letter: P
Question
Problem 12-14 (Algorithmic)
The management of Madeira Manufacturing Company is considering the introduction of a new product. The fixed cost to begin the production of the product is $30,000. The variable cost for the product is uniformly distributed between $20 and $25 per unit. The product will sell for $55 per unit. Demand for the product is best described by a normal probability distribution with a mean of 1,200 units and a standard deviation of 200 units. Develop an Excel worksheet simulation for this problem. Use 500 simulation trials to answer the following questions:
What is the mean profit for the simulation? Round your answer to the nearest dollar.
Mean profit = $
What is the probability that the project will result in a loss? Recalculate the numerical value of probability in percent and then round your answer to the nearest whole number.
Probability of Loss = %
Explanation / Answer
Let c = variable cost per unit
x = demand
Profit = 55x - cx - 30,000
= (55 - c) x - 30,000
Base case: Profit = (55 - 20) 1200 - 30,000 = 12,000
Worst case: Profit = (55 - 25) 200 - 30,000 = -24,000
The possibility of a $12,000 profit is interesting, but the worst case loss of $24,000 is risky.
Profit = sd(55-VC), here VC= variable cost ($20 and $25)
Profit = sd(55-VC) = 200(55-20) = $7000
Profit = sd(55-VC) = 200(55-25) = $6000
Mean profit = $6500
Profit = $6,000
Loss = $22,200, almost the probability of loss = 0.3 = 30%