The management of Madeira Manufacturing Company is considering the introduction

Question

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 $34,000. The variable cost for the product is expected to be between $18 and $30 with a most likely value of $27 per unit. The product will sell for $55 per unit. Demand for the product is expected to range from 400 to 1600 units, with 900 units the most likely demand.

Develop the profit model for this product. Enter your answer in the form of an expression. (Example: (c+10)x+800)

Profit =  

Provide the base-case, worst-case and best-case analyses. For those boxes in which you must enter subtractive or negative numbers use a minus sign. (Example: -300)

Discuss why simulation would be desirable.

A simulation   the probability of each scenario.

Let c = variable cost per unit x = demand

Explanation / Answer

c) In the simulation analysis, for the input variables: variable cost, c and demand, x, a probability distribution are assigned. Simulation begins by assigning each variable a random value based on its probability distribution. When those values as generated in simulation, as entered in the model (Profit model, Profit = 55*x - (34,000 + c*x)), the project’s NPV is generated. By repeating the trials multiple times, we get multiple NPV’s for different possibilities, which can be charted in to a graph like histogram. Thus we get to know the estimate for the project’s outcomes, based on the histogram’s analysis.

Let c = variable cost/ unit $18 tp $30 Most likely $ 27 per unit x = demand 400 to 1600 Most likely 900 units Fixed Cost= $ 34,000 Selling Price = $ 55 per unit a) Profit = Sales - Costs Profit = 55x - (34,000 + cx) b) Base case: Profit = $ -8,800.00 Worst case: Profit = $ -24,000.00 (x=400, c=$30) Best case: Profit = $ 25,200 (x=1600, c= $18)

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