Problem 12-01 (Algorithmic) PortaCom manufactures notebook computers and related
ID: 426865 • Letter: P
Question
Problem 12-01 (Algorithmic)
PortaCom manufactures notebook computers and related equipment. PortaCom's product design group developed a prototype for a new high-quality portable printer. The new printer features an innovative design and has the potential to capture a significant share of the portable printer market. Preliminary marketing and financial analyses provided the following selling price, first-year administrative cost, and first-year advertising cost:
In the simulation model for the PortaCom problem, the preceding values are constants and are referred to as parameters of the model.
An engineer on the product development team believes that first-year sales for the new printer will be 18,000 units. Using estimates of $41 per unit for the direct labor cost and $92 per unit for the parts cost, what is the first-year profit using the engineer's sales estimate?
$
The financial analyst on the product development team is more conservative, indicating that parts cost may well be $102 per unit. In addition, the analyst suggests that a sales volume of 10,500 units is more realistic. Using the most likely value of $41 per unit for the direct labor cost, what is the first-year profit using the financial analyst's estimates?
$
Why is the simulation approach to risk analysis preferable to generating a variety of what-if scenarios such as those suggested by the engineer and the financial analyst?
A simulation provide probability information about the various profit levels whereas a what-if analysis provide probability information about the various profit outcomes.
Explanation / Answer
Cost for the first year
Administrative Cost = $450,000
Advertising Cost = $550,000
Part 1
Forecast of no. of units that can be sold = 18,000
Total direct labour cost = $41*18000 = $738,000
Total parts cost = $92*18000 = $1,656,000
Hence, Total Cost = $450,000+$550,000+$738,000+$1,656,000 = $3,394,000
Total Revenue = $248*18000 = $4,464,000
Hence, the first-year profit using the engineer’s sales estimate = Total Revenue – Total Cost
= $4,464,000-$3,394,000
= $1,070,000
Part 2
Forecast of no. of units that can be sold = 10,500
Total direct labour cost = $41*10500 = $430,500
Total parts cost = $102*10500 = $1,071,000
Hence, Total Cost = $450,000+$550,000+$430,500+$1,071,000 = $2,501,500
Total Revenue = $248*10500 = $2,604,000
Hence, the first-year profit using the financial analyst sales estimate = Total Revenue – Total Cost
= $2,604,000-$2,501,500
= $102,500
Part 3
Risk Analysis is used analyse the harm that could be caused to a business depending upon some adverse events whereas simulation gives the probability information about the various output levels.
Simulation approach is preferable to risk analysis because using this approach we can come up to the various desired output levels and hence getting a significant idea as if what will be the output levels at various input levels. While, in risk analysis the adverse event is considered to analyse the harm to the business. Therefore, to generate a variety of what-if scenarios the simulation approach is suggested rather than risk analysis to check for the various output levels.