Practice Problem Set 1

1. Harold’s Product Launch

Harold owns a playground fabrication company called Play Inc. He is considering
whether or not to expand his business with a new product line of tire swings shaped
like animals. He expects to sell each swing at a price of $80. The materials to make
each swing will cost $10. He expects that it will take three hours of labour to make
each swing at $15 per hour. Storing tires requires a special storage facility with
special insurance because of the risk of fire. Harold estimates that the storage facility
and insurance will cost $1200 per month. In the first year, Harold expects to sell 500
units. He expects sales to be fairly constant at 750 units every year after that. Should
Harold launch this new product line?
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the layout of the spreadsheet model for this problem.
c. Build the spreadsheet model to help Harold make the decision.
d. How would Harold’s profit vary if the material cost/swing varies between $8
and $12?
e. How would Harold’s profit vary if the labour cost/hour varies between $12 and
$18?
f. How would Harold’s profit vary if the unit price varies between $75 and $85
and the unit material cost varies between $8 to $12?
g. Define three scenarios: Optimistic, Pessimistic and Base with respect to unit
price and cost and carry out a scenario analysis for Harold.
2. Rita’s Teak Furniture Shop
Rita owns a teak furniture shop. She is considering three promotional strategies for
the coming month.
Option A: Newspaper advertisements for a big sale in which everything in the store
is 15% off.
Option B: A promotional spot on the local television network, The Home Network,
focused on re-styling your dining space.
Option C: No investment in any new promotional activities.
If she goes with Option C, Rita expects to sell five bedroom sets, three dining room
sets, four china cabinets and eight patio sets. Rita sells bedroom sets for $4,500,
dining room sets for $3,500, china cabinets for $4000 and patio sets for $1,500. The
furniture sold at Rita’s store is of top quality. She purchases bedroom sets for $2,500,
dining room sets for $2,000, china cabinets for $2,000 and patio sets for $750. Her
business has monthly fixed costs of Operations and Salaries totaling $20,000.
Advertising in the newspaper costs $3,000, but two years ago when she used this
strategy, she sold one more bedroom set, two more dining room sets, no increased
amount of china cabinets and six more patio sets than she had expected. A
promotional spot in The Home Network costs $4,000 and as a result, Rita expects
that she will be able to sell four more dining room sets and three additional china
cabinets.
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the layout of the spreadsheet model for this problem.
c. Build a spreadsheet model to help Rita make the decision.
3. Restaurant opening
You are thinking of opening a restaurant that will have six four-person tables.
Each day that the restaurant is open, there are two lunch seating and three dinner
seating.
a. The restaurant will be closed on Monday.
b. The average lunch check is $20 and you earn a 40% profit margin on lunch
checks.
c. The average dinner check is $40 and you earn a 50% profit margin on dinner
checks.
d. Assume the fixed cost of running a restaurant is $400,000 per year.
Assuming 364 days in a year, use data table to show how annual profit changes as
percentage of seats filled at each meal varies between 10% and 100%.

4. Widget Manufacturing
A widget manufacturing company wants to decide the price of widgets. Each
widget requires 4 hours of labour at $12/hour and 3kg of raw materials at $50 per
kg. Fixed costs of operating the facility are $20,000 per year. Assume that the
number of units sold is 7,500 and base case price of widgets as $225 per unit.
a. The cost per unit of materials may vary between $48 and $52. How do the profit
and unit production cost vary with the material cost?
b. How does the profit vary with material and labour costs? The cost per unit of
labour varies between $11 and $14 and the cost per unit of materials varies between
$48 and $52.