ITIB4174 Business Analytics

Assignment Guidelines and Rubrics

Assignment 3 - Building a Monte Carlo Simulation Model to Predict Optimum Manufacturing Quantity – 20%

Start: Week 4
Due Date: Week 6

Learning Outcome:
CLO1: Explain the different types of analytics, and how it is being used in the various aspects of business
operations.

Instruction
Complete all tasks in this assignment.

Egress, Inc., is a small company that designs, produces, and sells ski jackets and other coats. The creative design
team has laboured for weeks over its new design for the coming winter season. It is now time to decide how
many ski jackets to produce in this production run. Because of the lead times involved, no other production runs
will be possible during the season. Predicting ski jacket sales months in advance of the selling season can be
quite tricky. Egress has been in operation for only three years, and its ski jacket designs were quite successful in
two of those years. Based on realised sales from the last three years, current economic conditions, and
professional judgment, 12 Egress employees have independently estimated demand for their new design for the
upcoming season. Their estimates are listed in Table 1.

Table 1 Estimated Demands (Units)

14,000 16,000

13,000 8000

14,000 5000

14,000 11,000

15,500 8000

10,500 15,000

To assist in the decision on the number of units for the production run, management has gathered the data
below. Note that S is the price Egress charges retailers.

Any ski jackets that do not sell during the season can be sold by Egress to discounters for V per jacket. The fixed
cost of plant and equipment is F. This cost is incurred regardless of the size of the production run.

Variable production cost per unit (C): $80

Selling price per unit (S): $100
Salvage value per unit (V): $30
Fixed production cost (F): $100,000

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Questions
1. Egress management believes that a normal distribution is a reasonable model for the unknown demand
in the coming year. What mean and standard deviation should Egress use for the demand distribution?
2. Use a spreadsheet model to simulate 1000 possible outcomes for demand in the coming year. Based on
these scenarios, what is the expected profit if Egress produces Q = 7800 ski jackets? What is the expected
profit if Egress produces Q = 12,000 ski jackets? What is the standard deviation of profit in these two cases?
3. Based on the same 1000 scenarios, how many ski jackets should Egress produce to maximise expected
profit? Call this quantity Q.
4. Should Q equal mean demand or not? Explain.
5. Create a histogram of profit at the production level Q.
6. Create a histogram of profit when the production level Q equals mean demand.
7. What is the probability of a loss greater than $100,000 in each case?

End of Assignment 3

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