PortaCom manufactures notebook computers and related equipment. PortaCom's product design group developed a prototype for a new high-quality portable printer. The new printer features an innovative design and has the potential to capture a significant share of the portable printer market. Preliminary marketing and financial analyses provided the following selling price, first-year administrative cost, and first-year advertising cost: Selling price = $284 per unit Administrative cost = $500,000 Advertising cost = $700,000
In the simulation model for the PortaCom problem, the preceding values are constants and are referred to as parameters of the model.
a. An engineer on the product development team believes that first-year sales for the new printer will be 18,500 units. Using estimates of 550 per unit for the direct labor cost and $88 per unit for the parts cost, what is the first-year profit using the engineer's sales estimate? b. The financial analyst on the product development team is more conservative, indicating that parts cost may well be $101 per unit. In addition, the analyst suggests that a sales volume of 9,500 units is more realistic. Using the most likely value of $50 per unit for the direct labor cost, what is the first-year profit using the financial analyst's estimates? c. Why is the simulation approach to risk analysis preferable to generating a variety of what if scenarios such as those suggested by the engineer and the financial analyst? A simulation provide probability information about the various profit levels whereas a what-if analysis provide probability information about the various profit outcomes.