Homework 1: Basic modeling, analysis and spreadsheet engineering This first assignment is designed to give you a chance to build some relatively simple spreadsheet based models. Use good spreadsheet model design principles such as separation of model inputs and outputs, appropriate cell formatting depending on the type of value in the cell, range names, comments or text boxes, and others as described in Ch 2 of Winston and Albright and in my slides. Feel free to develop your own model building style. Don't feel compelled to make things look exactly like Winston and Albright. There are many ways to create well designed, readable, clear spreadsheet models. Be creative. Use text boxes or cell comments to provide any answers or explanation required by the assignment. I ve broken the assignment up into two parts so that you can get started on it right away. This first part focuses on things we did in the first spreadsheet based modeling session. When you are done, you will end up with THREE different Excel files and a pdf. You will submit all four of them via Moodle. Analysis 1 Basic Break Even Analysis The owner of a relatively small business is trying to determine the breakeven level of sales of the company s single product. The fixed cost of manufacturing this product each month is $125,000. The unit cost of producing and selling this product is $150. The current selling price is $170 and the current demand for the product is 7000 units per month. In general, the owner believes that the unit selling price is best described by the expression: Selling Price 29. where D is the monthly demand for the product. The form of this function is called a power function. We ll learn more about this function soon. So, if monthly demand increases, we believe we can raise our selling price and that if it decreases we ll have to drop our selling prices. Let s call this equation the Selling Price Function (or SPF, for short). Assume for now that this business can meet the demand for its product each month. Your goal is to build a spreadsheet model that will allow you to do things like find the break even level of demand and do some sensitivity analysis to some of the key inputs. 1a Inf Diagram) Develop an influence diagram for this problem to use as the blueprint for a spreadsheet model you ll build to help you find the breakeven sales point. You can draw it by hand or use any electronic drawing/diagramming tool you d like. Figure out a way to get your influence diagram into a pdf file and 1
name it: BreakEven-InfDiagram-<your last name>.pdf. So, my file would be called BreakEven-InfDiagram-isken.pdf. 1b Base Model) Open a new Excel workbook and name it BreakEven- BaseModel-<your last name>.xlsx. Create a spreadsheet model to find the breakeven level of monthly sales in this case. Name the sheet containing the model logic Model1. Since I m going to ask you to create some Data Tables and to do some Goal Seeking, the structure of your model should be roughly similar to the Quality Sweaters Break Even model we did in class. Here s a check value for Demand=7000 you should get Profit=$17,657. Make sure you Save often. When implementing the Selling Price Function, you must define two range names for the constants in the function. Specifically, the cell containing the 29 should have a range name of SPF_constant and the cell containing the 0.2 should have a range name of SPF_exponent. 1c Defined Styles) Create a Defined Style called BaseInput and use it to format all of the base input values in your model (just as we did with Quality Sweaters problem in class.) 1d 1-way Data Table) Once your base model is done, create a one-way Data Table to show how profit is related to demand. Let demand range from 1000 to 10000 in steps of 1000. In addition, create a graph based on your Data Table so that it s easy to visualize the relationship between demand and profit. Make sure your graphs have all axes labeled, have titles, have axes properly formatted, have data series correctly labeled, and look good. Apply Conditional Formatting to your Data Table so that it is easy to distinguish between positive and negative profit values. 1e Break Even) Use Goal Seek to find the break even level of demand. So that I can tell you did the Goal Seek correctly, take a screen capture of the Goal Seek dialog box when it s filled in and paste the screen capture into your worksheet. 1f 2-way Data Table) You are also interested in the sensitivity of profit to different combinations of demand and the unit production cost. So, create a 2- way Data Table for these two input variables. Let demand vary from 1000 to 10000 in steps of 1000 and let the unit production cost vary from 100 to 180 in steps of 10. Again, use Conditional Formatting on the resulting table to allow the user to quickly see where profits are positive and negative. 1g Formula Auditing) Use the Formula Auditing tools to display the precedents of the cell containing Selling Price Function formula (you do have a such a cell, don t you?). Then take a screen shot and paste it into a new worksheet tab. Name this tab: SellPriceAudit. Hit Save. 2
Since this is our first assignment, I m going to paste in a high level screenshot of my answer to the first analysis. However, do NOT feel that your modeling style has to match mine. Of course, you must have some sort of logical style and layout to your model. OK, now we are going to extend this model a bit. Make sure your base model file is saved. Then do a Save As and create a copy of your file, naming it BreakEven-UncertainModel-<your last name>.xlsx. Analysis 2 Basic Break Even Analysis with Uncertainty 2a Modeling Demand Uncertainty) Now you are going to explore how uncertainty in the daily demand affects your estimates of expected profit. Here are the probabilities associated with each of the four demand levels: Demand Probability 5000 0.35 6000 0.10 7000 0.10 8000 0.45 Take a look at Example 2.4 in PMS for some ideas on how you can incorporate this type of uncertainty modeling into your break even model. In particular see Fig 2.22 and the use of the SUMPRODUCT function to compute the expected profit. HINT: For this problem, it s easier than in Example 2.4 since we just are looking at Demand and don t have an additional input like Order Quantity to worry about. So, we can just use a 1-way data table to get the profit values we need for the demand values shown above. 3
After doing that, we want to compare the result with the profit we would have gotten had we simply computed the expected demand, and plugged that expected demand value into the Demand cell in your model. Think back to introductory stats, the little table above is just a discrete empirical probability distribution. How do you compute the expected value (i.e. the average demand) from such a distribution? HINT: You might find the SUMPRODUCT() function useful. After you compute the expected (average) demand and then plug that value into the Demand cell in your model. How do the two expected profits compare to each other? Would you expect them to be the same? Why or why not? Later in the semester, we will do much more in depth uncertainty modeling using @Risk. Ok, save and close your file. Here s a screen shot of my Analysis 2 model. Analysis 3 Extended Break Even Analysis Now, make another copy of your original BreakEven-BaseModel-<your last name>.xlsx file and save it as a macro enabled workbook BreakEven- ExtendedModel-<your last name>.xlsm. You ll do the remaining parts of this question in this new copy. 3a Data Validation) Add Data Validation to the Demand cell so that it must be between 1000 and 10000. Then create a 1-Way Data Table to find Profit for demand between 0 and 12000 Yes, we are trying to see if we can defeat Data Validation via a Data Table. What happens? 3b Capacity Issues) Modify your model to take the following complication into account. If Demand is greater than 6000 we have to use overtime to be able to meet demand. In this case, we decide to model this by increasing the unit production cost from $150 to $175 for all units of demand above 6000. So, if demand is equal to 6500, we pay $150 unit production cost on the first 6000 units and pay $175 on the last 500 units. 4
After making the necessary model modifications, write a few short comments describing the differences in the results obtained with this extended model as compared to the original base model. For example, does the break even demand level change? Does this result make sense? Why or why not? 3c Automated Goal Seek) Remember to enable the Developer tab on the ribbon so that you can use the macro recorder. Record a Macro of you using Goal Seek to find the break even demand level. When the Goal Seek is done, don t stop the macro recorder quite yet. Copy the value from the Demand cell and paste it somewhere else so that you can see the break even value even if we change demand. Stop the recorder. Then attach that Macro to a button from the Forms Toolbox so that you can update the break even demand at the click of a button. We did this in class with the Break Even model. 3d Worksheet Protection) Finally, protect your worksheet so that the user is only allowed to enter data in the base input cells. Do NOT password protect the sheet or workbook. Here s a screen shot of my Analysis 3 model. Submit all three of your Excel model files and your Influence Diagram pdf via Moodle. 5