Chapter 2 Introduction Influence Diagrams BASIC PROFIT MODEL.
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Chapter 2 Introduction Influence Diagrams BASIC PROFIT MODEL BASIC PROFIT MODEL
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Transcript of Chapter 2 Introduction Influence Diagrams BASIC PROFIT MODEL.
Chapter 2
IntroductionInfluence Diagrams
BASIC PROFIT MODELBASIC PROFIT MODEL
Introduction
In building spreadsheets for deterministic models, we will look at:
ways to translate the black box representation into a spreadsheet model.
recommendations for good spreadsheet model design and layout
suggestions for documenting your models
useful features of Excel for modeling and
analysis
Price Revenue received from selling units
Total Revenue
Fixed Cost
Variable Costs
Overhead Costs
Sunk Costs
Total Costs
Profit
Breakeven Point
Crossover Point
Examples
Step 1: Study the Environment and Frame the Situation
The Pies are then processed and sold to local grocery stores in order to generate a profit.
Follow the three steps of model building.
Example 1: Simon Pie
Critical Decision: Setting the wholesale pie price
Decision Variable: Price of the apple pies (this plus cost parameters will determine profits)
Two ingredients combine to make Apple Pies: Fruit and frozen dough
Step 2: Formulation
Model
Using “Black Box” diagram, specify cost parameters
The next step is to develop the logic inside the black box.
A good way to approach this is to create an Influence Diagram.
Pie PriceUnit Cost, FillingUnit Cost, Dough
Unit Pie Processing CostFixed Cost
An Influence Diagram pictures the connections between the model’s exogenous variables and a performance measure (e.g., profit).
Exogenous Variables
Profit
Black Box View of Simon Pie Model
MODEL
Unit Cost, Filling
Pie Price
Unit Cost, Dough
Fixed CostUnit Pie Processing Cost
Profit
Influence Diagram
To create an Influence Diagram:start with a performance measure variable.
Further decompose each of the intermediate variables into more related intermediate variables.
Decompose this variable into two or more intermediate variables that combine mathematically to define the value of the performance measure.
Continue this process until an exogenous variable is defined (i.e., until you define an input decision variable or a parameter).
performance measure variable
ProfitStart here:
Decompose this variable into the intermediate variables Revenue and Total Cost
Profit
Revenue Total Cost
Now, further decompose each of these intermediate variables into more related
intermediate variables ...
Profit
Revenue Total Cost
Pies Demanded
Pie PriceUnit Pie
Processing Cost Fixed Cost
ProcessingCost
IngredientCost
Unit CostFilling
Unit CostDough
RequiredIngredientQuantities
Step 3: Model Construction
Based on the previous Influence Diagram, create the equations relating the variables to be specified in the spreadsheet.
Profit
Revenue Total Cost
Profit = Revenue – Total Cost
Profit
Revenue
Pie Price
Pies Demanded
Revenue = Pie Price * Pies Demanded
Fixed Cost
ProcessingCost
IngredientCost
Profit
Total Cost
Total Cost = Processing Cost + Ingredients Cost + Fixed Cost
Processing Cost = Pies Demanded * Unit Pie Processing Cost
ProcessingCost
Total Cost
Pies Demanded
Unit PieProcessing Cost
Profit
Ingredients Cost = Qty Filling * Unit Cost Filling + Qty Dough * Unit Cost Dough
IngredientCost
Profit
Total Cost
Unit CostFilling
Unit CostDough
RequiredIngredientQuantities
Examples
