Question

The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for a new product. The selling price for the product will be $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows:  

Procurement Cost ($)	Probability	Labor Cost ($)	Probability	Transportation Cost ($)	Probability
10	0.25	20	0.10	3	0.75
11	0.45	22	0.25	5	0.25
12	0.30	24	0.35
		25	0.30

a) Construct a simulation model to estimate the mean profit per unit.  

b) Management believes that the project may not be sustainable if the profit per unit is less than $5. Use simulation to estimate the probability that the profit per unit will be less than $5.

Answer 1

a.)

Purchse cost	Probability (Pi)	Total Purchase Cost
10	.25	= (10 * .25) = 2.5
11	.45	= 4.95
12	.30	= 3.6
TOTAL		$ 11.05

Labour cost	Probability (Pi)	Total Labour Cost
20	.10	= (20 * .10) = 2.00
22	.25	= 5.50
24	.35	= 8.40
25	.30	= 7.50
TOTAL		$ 23.40

Transportation cost	Probability (Pi)	Total Transportation Cost
3	.75	= (3 * .75) = 2.25
5	.25	= 1.25
TOTAL		$ 3.50

Profit per unit = Selling Price - Purchase Cost - Labour Cost - Transportation Cost

= 45 - 11.05 - 23.40 - 3.50

= $ 7.05

b.)

Simulation provide a distribution of the profit per unit values. Calculating the percentage of simulation trails providing a profit a profit less than $5 per unit would provide an estimate of the probability the profit per unit will be unacceptably low.