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Prediction of Future Ski Jacket Demand Using Simulation

An Analysis.

Egress Inc.

Egress Inc. is a relatively new ski jacket production company. In order to predict the quantity of
Ski Jackets Egress should manufacture for next season, we need to simulate the demand and also
predict the quantity to manufacture that will maximize the profits.

Question No. 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?
Answer No. 1
Assuming that the demand is distributed normally, using the twelve random values for demand
predicted by the employees of the company as follows:
14,000
13,000
14,000
14,000
15,500
10,500

16,000
8,000
5,000
11,000
8,000
15,000

We calculate the mean of the demand by adding all the values in the above table and dividing
them by 12. Alternatively we can use AVG function in excel as shown in the excel file.
Mean = 12,000
The standard deviation can be calculated using the STDEV function of excel as shown in the
excel file.
Standard Deviation = 3497

Question No. 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?
Answer No. 2
To simulate the 1000 possible outcomes for demand, we first generate 1000 random numbers in
excel using the RAND function. This generates 1000 random numbers between 0 and 1. As we
have already assumed that demand is modeled on the normal distribution, we use these random
numbers as probabilities in normal distribution and use them to calculate 1000 different values
for demand. This is done in excel by using the NORM.INV function with the mean and standard
deviation as 12,000 and 3497 respectively, as calculated in the answer to Question no. 1.
Then we fix the production as 7800 and calculate the profit for each demand using the monetary
values given in Exhibit-1. Please see the excel sheet for Question No. 2 in the attached file.
We then change the production to 12,000 and calculate the profit against each demand using the
monetary values given in Exhibit-1. Please see the excel sheet for Question No. 2 in the attached
file.
The random numbers stay the same for both the instances.
The average profit for both instances is calculated and this average profit is the expected profit if
the respective number of ski jackets are produced.
Please see exhibit-2 for the details of the expected profit and the standard deviation of the profits
for both the cases.

Question No. 3
Based on the same 1000 scenarios, how many ski jackets should Egress produce to maximize
expected profit? Call this quantity Q*.
Answer No. 3
3

Using the same random number and demand as used in Question no. 2, we use the solver
function of excel to check at which production level the profit will be maximum.
The answer comes out as follows:
Q* = 10,129

Question No. 4
Should Q* equal mean demand or not? Explain.
Answer No. 4
To analyze the answer to this question we need to calculate the average or expected profits at
different values of demand. For this we use the data table function in the what-if analyses section
of excel. This gives us the values of the expected profits at different values of demand as per
Exhibit-3.
Using these values we plot a graph of expected profit versus the demand. The graph comes out as
Exhibit-4.
Upon analyzing this graph we find that the expected profit at mean demand is lower than the
profit at the value of Q* we calculated.
Also the standard deviation of expected profit at production of 12,000 (i.e. $145,537) is much
higher than that at the production of Q* (i.e. $100,865).
Thus the value of Q* should not be equal to the mean demand.

Question No. 5
Create a histogram of prot at the production level Q*. Create a histogram of prot when the
production level Q equals mean demand. What is the probability of a loss greater than $100,000
in each case?
Answer No. 5
4

The histogram of profit for production level Q* is given in Exhibit-5 and the histogram for the
profit at production level of mean is given in Exhibit-6.
The probability of loss greater than $100,000 at different production level is given as follows:
Production
Level
Q* i.e. 10,129
Q = 12,000

Probability of
Loss Greater
than $100,000
9.1 %
17.2 %

Please see the tab of Question No. 5a, 5b, Histogram for Q5a and Histogram for Q5b in the
attached excel file for details.

Exhibit-1
5

Variable cost Per


Unit (C) =
Selling Price Per
Unit (S) =
Salvage Price (V) =
Fixed Production
Costs (F) =

$80
$100
$30
$100,000

Exhibit-2
If Production is 7800 Units
Expected Profit =
Standard Deviation of
Profit =
If Production is 12000
Units
Expected Profit =
Standard Deviation of
Profit =
Exhibit-3

Producti
on
10129.16
782
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000
17000

18000

19000

$41,33
5
$53,28
1
$42,13
9
$145,5
37

Profit
55,750.70
-2,249.42
15,162.66
30,942.28
43,560.68
52,044.58
55,686.69
52,625.73
42,139.14
23,823.01
-2,369.27
-35,242.98
-73,375.82
115,779.4
3
161,409.3
1
209,150.7
6

Exhibit-4

Profit VS Production
Profit
100,000.00
50,000.00
0.00
-50,000.00
-100,000.00
-150,000.00
-200,000.00
-250,000.00

Exhibit-5

Histogram for Production of 10,129 Ski Jackets


800
700
600
500
400
Frequency

300
200
100
0

PROFIT

Exhibit-6

Histogram for Q= 12000

Frequency

700
600
500
400
300
200
100
0

573

10

17

17

27

37

48

43

60

82

70

PROFIT
Frequency