PortaCom manufactures notebook computers and related equipment. PortaCom\'s prod
ID: 461792 • Letter: P
Question
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 20,500 units. Using estimates of $50 per unit for the direct labor cost and $89 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 $104 per unit. In addition, the analyst suggests that a sales volume of 12,000 units is more realistic. Using the most likely value of $50 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 will provide probability information about the various profit levels whereas a what-if analysis will not provide probability information about the various profit outcomes.
Explanation / Answer
First-year profit using Engineer's estimate = $ 1,155,000
First-year profit using Financial Analyst's estimate = $ 40,000
Engineer's Sales Estimate 20500 units Revenue 249 5,104,500 Admin Cost 400,000 -400,000 Advtg Cost 700,000 -700,000 Direct labor cost 50 -1,025,000 Direct parts cost 89 -1,824,500 Profit 1,155,000