Question

business analysis

The Simon Pie Company generates profit from combining two purchasing ingredients (fruit and frozen dough) into apple pies, processing the pies (cooking, packaging, delivery, etc.), and selling them to local grocery stores. The company's founder Samuel Simon intends to build an Excel model to explore his options. Question 1: a. Explain the influence diagram below. b. What are the decision variables; the parameters, the exogenous variables and the endogenous ones? Profit Revenue Total Cost Ingredient Processing Cost Required Ingredient Quantities Pies Demanded Pie Price Unit Pie Processing Cost Unit Cost Filling Unit Cost Dough Fixed Cost

Answer 1

Answer a. The influence diagram depicts the process of generating profit for Simon Pie company. It shows the factors that influence the profit of the company. Profit depends on the total cost and total revenue of the company. The difference between the two is the amount of profit or loss where revenue>cost = profit else cost<revenue = loss. Then the diagram shows the constituents of total cost and total revenue.

Total cost is the sum total of processing cost,ingredient cost and fixed cost. The factors that determine ingredient cost are unit cost of dough, unit cost of filling and the quantity of required ingredient which would be decided by number of pies demanded. As per the demand of pie, the company would require the ingredients accordingly to provide the demanded pies. Processing cost of the pie depends on the processing cost of per unit of pie and number of pie demanded. The price of the pie would decide the quantity of pie demanded.

Total Revenue is the outcome of the price of the pie and quantity demanded of the pie. The quantity demanded depends upon how much the company charges for pie(price of the pie).

Answer b. The decision variable is pie price as the company has control over setting its own price for pie.

The parameters are fixed costs (which is not in control of company at least t in short run) and ingredient costs. Unit cost of filling and dough depends on the terms with suppliers which is not in control of company(at least in short run)

The exogenous variables are fixed costs, unit costs of dough and filling and unit pie processing costs.

The endogenous variables are price and quantity. The price of the company would decide the quantity demanded and quantity demanded in turn would determine the processing cost and quantity of ingredients required. The quantity demand would again help the firm in determining price.