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Problem Set 1: Basics of Spreadsheet Modelling

(Influence Diagrams, Black Box Diagrams, Spreadsheet Layout, Building
Basic Models)
1. Pricing Decision
Determine the price we should set for our product so as to generate the highest
possible profit in the coming year. Draw the influence diagram and the black box
diagram for this problem.
2. SwimSkin Inc.
SwimSkin Inc. is trying to decide the price of a new line of swimwear called
FastSkin. The sales group at SwimSkin Inc. has estimated that it could sell about
3000 units of FastSkin at a price of $129.95. The company has a policy that all prices
must end in 9.95. Manufacturing cost per unit of the product is $75.75 and the fixed
manufacturing cost is $52,000. Distribution cost per unit is $5. Marketing cost is
$75,000 and Sales and Administration costs is $18,000.
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 base case spreadsheet model to help SwimSkin Inc. make the decision.
3. The Advertising Budget Decision
As product-marketing manager, one of our jobs is to prepare recommendations to
the Executive Committee as to how advertising expenditures should be allocated.
Last year’s advertising budget of $40,000 was spent in equal increments over the
four quarters. Initial expectations are that we will repeat this plan in the coming year.
However, the committee would like to know whether some other allocation would
be advantageous and whether the total budget should be changed.
Our product sells for $40 and costs us $25 to produce. Sales in the past have been
seasonal and our consultants have estimated seasonal adjustment factors for unit
sales as follows:
Q1: 90%; Q2: 110%; Q3: 80%; Q4: 120%
(A seasonal adjustment factor measures the percentage of average quarterly demand
experienced in a given quarter.)
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In addition to production costs, we must take into account the cost of the sales force
(projected to be $34,000 over the year, allocated as follows: Q1 and Q2, $8,000 each;
Q3 and Q4, $9,000 each), the cost of advertising itself, and overhead (typically
around 15% of revenues). Clearly, advertising will increase sales, but there are limits
to its impact. Our consultants several years ago estimated the relationship between
advertising and sales. Converting that relationship to current conditions gives the
following formula:
𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 35 × 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 × √(3,000 + 𝐴𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔)
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 base case spreadsheet model to help make the decision.
4. Honeydukes Co.
Honeydukes Co. is a food-processing firm that purchases surplus grapes from grape
growers, dries them into raisins, applies a layer of sugar, and sells the sugar-coated
raisins to major cereal and candy companies. At the beginning of the grape-growing
season, Honeydukes has two decisions to make: 1) how many grapes to buy under
contract and 2) how much to charge for the sugar-coated raisins it sells.
In the spring, Honeydukes typically contracts with a grower who will supply a given
amount of grapes in the autumn at a fixed cost of $0.25 per pound. The balance
between Honeydukes’ grapes requirements and those supplied by the grower must
be purchased in the autumn in the open market at a price that could vary between
$0.25 per pound to $0.35 per pound. Honeydukes, however, cannot sell grapes on
the open market in autumn if it has a surplus in inventory because it has no
distribution system for such purposes.
The other major decision facing Honeydukes is the price to charge for sugar-coated
raisins. Honeydukes has several customers who buy its output in price-dependent
quantities. Honeydukes negotiates with these processors as a group to arrive at a
price for the sugar-coated raisins and the quantity to be bought at that price. The
negotiations happen in spring, long before open market price of grapes is known.
Based on experience, Ambrosius Flume, Honeyduke’s general manager, believes
that if Honeydukes prices the sugar-coated raisins at $2.20 per pound, the
processors’ orders will total 750,000 pounds of sugar-coated raisins. This total will
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increase by 15,000 pounds for each penny reduction in sugar-coated raisin price
below $2.20. The same relationship holds in the other direction: demand will drop
by 15,000 for each penny increase. The price of $2.20 is a tentative starting point in
the negotiation.
Sugar-coated raisins are made by washing and drying grapes into raisins, followed
by spraying the raisins with a sugar coating that Honeydukes buys for $0.55 per
pound. It takes 2.5 pounds of grapes and 0.05 pound of coating to make one pound
of sugar-coated raisins, the balance being water that evaporates during grape drying.
In addition to the raw material cost for the grapes and the coating, Honeydukes’
processing plant incurs a variable cost of $0.20 to process one pound of grapes into
raisins, up to its capacity of 1,500,000 pounds of grapes. For volumes above
1,500,000 pounds of grapes, Honeydukes outsources grapes processing to another
food processor which charges $0.45 per pound. This price includes just the
processing cost, as Honeydukes supplies both the grapes and the coating required.
Honeydukes also incurs fixed costs in its grape-processing plant of $200,000 per
year.
Ambrosius Flume has asked you to analyze the situation to guide him in the
upcoming negotiations. His ultimate goal is to examine the effect of various
scenarios on Honeydukes’ profits. As a basis for further analysis, he suggests using
a contract purchase price of $0.25 with a supply quantity of 1 million pounds from
the grower, along with a selling price of $2.20 for sugar-coated raisins. He is mainly
interested in evaluating annual profit (before taxes). He believes that the open-
market grape price will most likely be $0.30.
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 base case spreadsheet model to help Ambrosius Flume.