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Ski jacket Demand Analysis.
Egress Inc.
predict the quantity of Ski Jackets Egress should manufacture for next season.

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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

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

800

700

600

500

400

Frequency

300

200

100

0

PROFIT

Exhibit-6

Frequency

700

600

500

400

300

200

100

0

573

10

17

17

27

37

48

43

60

82

70

PROFIT

Frequency

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