Question

Problem 12-01 (Algorithmic) 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 = $237 per unit Administrative cost = $300,000 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 20,000 units. Using estimates of $38 per unit for the direct labor cost and $94 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 $100 per unit. In addition, the analyst suggests that a sales volume of 10,500 units is more realistic. Using the most likely value of $38 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.

Answer 1

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Part a
		Per unit	For 20,000 Units
Selling Price		$          237	$                 4,740,000
Less: Cost
Direct Material		$             94	$                 1,880,000
Direct Labor		$             38	$                    760,000
Administrative Cost			$                    300,000
Advertising Cost			$                    700,000
Profit			$                 1,100,000
Part b
		Per unit	For 10,500 Units
Selling Price		$          237	$                 2,488,500
Less: Cost
Direct Material		$          100	$                 1,050,000
Direct Labor		$             38	$                    399,000
Administrative Cost			$                    300,000
Advertising Cost			$                    700,000
Profit			$                       39,500
Part c
Will
Will Not