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Objective 309.3.1-01: Use probabilistic simulation to estimate

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Objective 309.3.1-01: Use probabilistic simulation to estimate the best decision alternative in a given situation. Introduction:

The following task, in which you are asked to conduct a small number of simulation trials, should be done with manual calculations. Please be aware that the simulation results of such a small number of trials would not be sufficient for one to draw valid conclusions in a real situation. A large number of trials run on a computer would be necessary in order to arrive at a valid conclusion.

Given:

Management has asked you to help estimate the most likely cost per unit to produce a new product so that they can project profits at different selling prices. You are to simulate cost behavior using probabilistic simulation (Monte Carlo simulation) and have been provided with the following cost estimates. Materials cost will range between $33 and $39 per unit, labor between $22 and $28 per unit, and utilities between $3 and $6 per unit. The probability distributions of cost per unit are as follows.

Materials: • The probability is .18 that the cost will be $33. • The probability is .23 that the cost will be $35. • The probability is .32 that the cost will be $38. • The probability is .27 that the cost will be $39.

Labor: • The probability is .12 that the cost will be $22. • The probability is .18 that the cost will be $23. • The probability is .22 that the cost will be $24. • The probability is .28 that the cost will be $25. • The probability is .20 that the cost will be $28.

Utilities: • The probability is .26 that the cost will be $3. • The probability is .43 that the cost will be $4. • The probability is .31 that the cost will be $6.

Task:

A. Complete the attached “Simulation Template” to determine the following costs: 1. Average materials cost per unit 2. Average labor cost per unit 3. Average utilities cost per unit 4. Average total cost per unit

Note: Run 10 trials using the random numbers that are provided on the “Simulation Template” for each probability distribution. Use the random numbers in the exact sequence that they appear on the template for each cost.

Note: Submit your completed spreadsheet as an attachment to this task.

B. Determine the selling price per unit that should be established for this product using your simulation results and assuming that the company wants to realize an average markup of $20 on each unit sold.