Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.
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Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis
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Transcript of Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.
Spreadsheet Models - DSS
Basic Profit ModelsWhat-if, Sensitivity Analysis
Lecture Objectives
You should be able to :
1. Analyze a business situation and draw an influence diagram.
2. Build basic profitability models on a spreadsheet.
3. Perform what-if, sensitivity analyses.
Breakeven Analysis
Consider a relatively simple situation:
Sally owns a motel with a hundred rooms. Fixed daily cost is $1000 (includes mortgage, staff salaries, maintenance). Variable cost per room is $10 per day (includes extra utility cost, room cleanup, etc). At a fixed room price of $50 per day, what is the breakeven point?
Draw an influence diagram leading up to your profit.
Compute the breakeven point.
Influence Diagram
Profit
Revenue Cost
Price/RoomNumber of
Rooms RentedVariable Cost Fixed Cost
VC/RoomThe boxes that cannot be split any further (for this simple example) are the basic inputs for the analysis. How is Number of Rooms Rented different from the rest of the inputs? Are there any other dependencies that are not shown above?
Breakeven Analysis
Price 50
FC 1000
VC/unit 10
Rooms 5 10 15 20 25 30 35 40 45 50
Rev 250 500 750 1000 1250 1500 1750 2000 2250 2500
FC 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
VC 50 100 150 200 250 300 350 400 450 500
Tot Cost 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500
Profit -800 -600 -400 -200 0 200 400 600 800 1000
Breakeven Point
Breakeven Analysis
0
500
1000
1500
2000
2500
3000
0 5 10 15 20 25 30 35 40 45 50
Number of Rooms Rented
Do
llar
s
Revenue
Tot Cost
Crossover Point
You have the option of subcontracting to improve room quality and the surroundings, but that would increase fixed costs to $1800, with no change to variable costs. You will, however, be able to charge $70 per room per day. At what point will you be indifferent between your current mode of operation and the new option?
Crossover Analysis – Point of Indifference
Case 1 Case 2
Price 50 70
FC 1000 1800
VC/unit 10 10
Case 1
Rooms 20 40 60 80 100
Rev 1000 2000 3000 4000 5000
FC 1000 1000 1000 1000 1000
VC 200 400 600 800 1000
Tot Cost 1200 1400 1600 1800 2000
Profit -200 600 1400 2200 3000
Case 2
Rooms 20 40 60 80 100
Rev 1400 2800 4200 5600 7000
FC 1800 1800 1800 1800 1800
VC 200 400 600 800 1000
Tot Cost 2000 2200 2400 2600 2800
Profit -600 600 1800 3000 4200
Crossover Analysis
Crossover Analysis
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
0 10 20 30 40 50 60 70 80 90 100
# Rooms
$ P
rofi
t
Profit 1
Profit 2
Pricing Analysis – Demand FunctionIf the demand for rooms depends on the price as
follows: Quantity Demanded = 200 - 3*price,what price should Sally charge for a room?
Assume Fixed Cost is still $1000 per day and Variable cost is $10 per day per room.
1. Determine the Goal. 2. How would Sally get such a demand equation
for her business?3. Determine the best price to help her reach her
goal.
Price and ProfitPricing Strategy Example
Max Rooms 100
FC 1000 Demand = 200 - 3*p
VC/unit 10 Intercept Slope
200 3
Price 0 10 20 30 40 50 60 70 80
Rooms Demanded 200 170 140 110 80 50 20 -10 -40
Rooms Rented 100 100 100 100 80 50 20 0 0
Rev 0 1000 2000 3000 3200 2500 1200 0 0
FC 1000 1000 1000 1000 1000 1000 1000 1000 1000
VC 1000 1000 1000 1000 800 500 200 0 0
Tot Cost 2000 2000 2000 2000 1800 1500 1200 1000 1000
profit -2000 -1000 0 1000 1400 1000 0 -1000 -1000
What is the best price?
Profit Vs. PriceMotel Pricing Analysis
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
0 10 20 30 40 50 60 70 80
Price/Room ($)
Pro
fit/
Day
($)
Sensitivity Analysis
If the estimate of Variable Costs ($10 per room per day) is inaccurate, how does it affect the solution?
Pricing Strategy Example
Price 50
FC 1000
VC/unit 10
Rooms 50
Rev 2500
FC 1000 The table below shows profits at different prices and variable costs
VC 500
Tot Cost 1500 Prices per room
profit 1000 30 35 40 45 50 55 60
7 1300 1660 1640 1470 1150 680 60
8 1200 1565 1560 1405 1100 645 40
9 1100 1470 1480 1340 1050 610 20
VC 10 1000 1375 1400 1275 1000 575 0
11 900 1280 1320 1210 950 540 -20
12 800 1185 1240 1145 900 505 -40
13 700 1090 1160 1080 850 470 -60
Sensitivity to Variable Costs
Sensitivity Analysis
-500
0
500
1000
1500
2000
20 24 28 32 36 40 44 48 52
Price/Room
Pro
fit
$
VC = 7
VC = 8
VC = 9
VC = 10
VC = 11
VC = 12
VC = 13
Extend the Analysis
How would this entire analysis change if you were analyzing a larger hotel like the Marriott instead of a motel?
