Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis

Transcript of Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

Page 1: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

Spreadsheet Models - DSS

Basic Profit ModelsWhat-if, Sensitivity Analysis

Page 2: Spreadsheet Models - DSS Basic Profit Models What-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.

Page 3: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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.

Page 4: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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?

Page 5: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 6: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 7: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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?

Page 8: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 9: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 10: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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.

Page 11: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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?

Page 12: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

($)

Page 13: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 14: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

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

Page 15: Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis.

Extend the Analysis

How would this entire analysis change if you were analyzing a larger hotel like the Marriott instead of a motel?