Beruflich Dokumente
Kultur Dokumente
Assignment 2, Part 2 of 2
Please enter the names of all team members who worked together on this assignmen
Names:
Instructions
Once you have all the models and Data Tables entered for these two problems,
a recalculation of this complete Part 2 workbook should be almost instantaneous.
Download this file to your computer, solve the problems, and when you have
finished, then upload your completed spreadsheet to the Canvas page for
Assignment 2, Part 2.
Only one upload per team.
NOTE: To run the simulations in this assignment, you must use the Excel
Data Table procedure. Copying a formula down for the thousands of required
iterations will not receive full credit.
If you work on this assignment as a team, please upload only one file per
team. But make certain the names of all team members are shown in the
space above. (I also have to take points off if a team member's name is left
off the submission.)
- Prof. Smith
her on this assignment.
ecause the
problems,
stantaneous.
The Flaw of Averages
One of the strengths of Monte Carlo simulation is that it takes variability and
chances into account. Building a deterministic model, with fixed inputs, and using
average values, does not take variability into account. Therefore, using average
values in a business model can lead to the wrong decision.
This effect is what Dr. Sam Savage of Stanford calls the "flaw of averages."
(See also the warehouse problem on the next worksheet.)
Research has shown that the average number of passengers on this route will be
about 56 people. The airline has an aircraft with a capacity of 57 seats, so that should
work. But you want to be certain the fixed costs (aircraft lease, crew wages, terminal
rent, etc.) will be covered. Numbers relevant to the decision are shown below.
Aircraft capacity 57
Average passenger load 56
Ticket price $300
Average revenue $16,800
Fixed costs for 57-seat a/c $13,800
Gross profit over fixed costs $3,000
Based on this average passenger load, the gross profit over the fixed costs looks fine.
Yes, you should assign the 57-seat aircraft to this route.
The Variable
Demand won't always be exactly 56 passengers, though. The research into the
number of passengers on this route shows that the number is rarely less than 30. But
almost 20% of the time, more than 75 people have wanted to fly.
Therefore, you have decided it makes sense to model the passenger load by using a
lognormal distribution with a mean of 56.
A lognormal distribution is not symmetric around its mean. It has a long right tail,
which makes sense in this case, to account for the 20% of demand which is greater
than 75.
The logs of a lognormal distribution, however, are in fact normally distributed. And
the median of the lognormal distribution will be equal to the mean of the normal
distribution. So we can specify the lognormal distribution by using the log of the
mean of the normal distribution.
That sounds a little more complicated than it really is. For this situation, let's use a
lognormal distribution with a mean equal to the log of 50. Log of 50 = LN(50) = 3.9120.
A standard deviation of 0.50 works well here. So the formula for the number of
passengers wishing to fly on the route will be:
=LOGNORM.INV(RAND(),LN(50),0.5)
Your Assignment
Develop a Monte Carlo simulation of 5,000 iterations of the demand formula. For each
of the 5,000 demand numbers, calculate the gross profit over fixed costs for that
level of passenger demand. (Remember that the aircraft has a maximum capacity of 57
passengers.)
1 Place your Excel Data Table of 5,000 Monte Carlo simulations in the heavy red-outlined
columns to the right of this question. Don't bother to round your values. Fractional
passengers don't make sense, but for purposes of this decision model, it doesn't
make any difference. Just leave the unrounded values in your Data Table.
2 Calculate the mean and the median of the lognormal distribution. The mean should
be close to 56. The median should be close to 50, since we said 50 is the mean of the
underlying normal distribution.
3 Create a frequency table and histogram of your lognormal distribution. You should
see that it has a long right tail, and the mean of the lognormal distribution actually
falls to the right of the peak.
Bins Frequencies
15 41
25 405
35 773
45 881
55 780
65 622
75 426
85 327
95 240
105 165
115 99
125 84
135 50
145 32
155 22
More 53
Total 5000
Histogram of Lognormal Simulations
Frequency Distribution
1000
900
800
700
600
500
400
300
200
100
700
600
500
400
300
200
100
0
15 25 35 45 55 65 75 85 95 105 115 125 135 145 155 More
4 Confirm that the logs of a lognormal distribution are normally distributed. Take the
natural logarithm (use the LN function in Excel) of each data point in your Monte Carlo
simulation. Place your calculations in Column L, alongside your simulation values.
5 Create a frequency table and histogram of the calculated logs. You should find that
the histogram has the symmetric mound shape of a normal distribution. The tallest
bar usually should contain the mean of LN(50) = 3.9120.
Bins Frequencies
2.2 0
2.4 3
2.6 13
2.8 46
3.0 121
3.2 231
3.4 375
3.6 562
3.8 726
4.0 772
4.2 743
4.4 575
4.6 399
4.8 248
5.0 119
5.2 45
5.4 17
More 5
Frequency Distribution
900
800
700
600
500
400
300
200
100
0
2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 5.2 5.4 More
6 Calculate the gross profit over fixed costs for each level of demand in your Monte Carlo
simulation. Place your calculations in Column M, alongside the existing calculations.
Your calculated gross profit over fixed at each demand level must take into account
the fact that the aircraft has a maximum capacity of 57 passengers.
7 What is the average gross profit over fixed costs from your Monte Carlo simulation?
That is, what's the mean of your calculations in Column M?
8 Given this average gross profit over fixed, should you assign the 57-seat aircraft to
this route? Place a border around the letter of your answer below.
A. Yes
B. NO!
The Problem
A warehouse management firm owns a piece of land where they intend to construct a
new warehouse. After the warehouse is constructed, the firm will do a sale-leaseback.
The firm then will make an annual lease payment of $7.00 per square foot. That will be
its annual cost for the warehouse.
The firm will rent out the space in the warehouse. It intends to charge $8.00 per square
foot per year to companies who rent space in the warehouse.
Demand at this location for space in a warehouse is forecast to average 225,000 square
feet per year. That number could vary, however. The expected range is from a low of
around 185,000 square feet to a high of around 265,000 square feet. But the most
likely level of demand is close to 225,000 square feet. Those high and low values are
forecast to be not very likely.
The firm believes, therefore, that annual demand can be modeled by a normal
distribution. It will use a mean of 225,000 s.f., and a standard deviation of 20,000 for the
normal distribution.
The firm has built many such warehouses in the past, and it has two standard designs it
could use in this case. One design has a capacity of 175,000 square feet; the other
design has a capacity of 230,000 square feet. Each of the two designs will have the
same annual lease cost per square foot of $7.00. And each will bring in $8.00 per
rented square foot in revenue.
The question facing the firm now is this: Which size warehouse should it choose for this
location, given this demand forecast, in order to maximize its annual profit?
Data
At an average demand of 225,000 square feet per year, the revenue and cost numbers
look like this:
Conclusion: Using the average demand of 225,000 s.f., the more profitable
option is the LARGER warehouse.
Your assignment
Develop an Excel model of this problem which takes the range of possible demand into
account. Model the demand by pulling random values from a normal distribution with
a mean of 225,000 and a standard deviation of 20,000.
Place your model to the right of this paragraph, in the section marked "Model." I have
sketched out a basic structure for you.
Use an Excel Data Table to run 10,000 simulations of the demand. At each level of
demand, compute the annual profit for each of the two warehouse sizes. Place the
annual profit calculations in two columns, adjacent to the demand column.
The formula in the cell for annual profit at each simulated level of demand should be:
Revenue at that level of demand
(Revenue = revenue from the demand in that row, or from
the maximum warehouse capacity, whichever is less)
Minus warehouse lease cost ($7.00 times warehouse size in square feet)
Equals annual profit at the level of demand in that row of the Data Table
Profit @ Profit @
Demand 175,000 s.f. 230,000 s.f.
Place your model to the right of this paragraph, in the section marked "Model."
1 The 10,000 demand numbers in your simulation should come from a normal
distribution. Just to confirm that, compute the mean and standard deviation, and do a
frequency table and histogram in the spaces below. Your mean and standard deviation
should be close to 225,000 and 20,000. Your histogram should have the symmetric
mound shape characteristic of a normal distribution. The bar containing the mean of
225,000 should most often be the tallest bar.
Mean 215,920
Standard deviatio 0
Frequency Distribution
12000
10000
8000
6000
4000
2000
0
00 00 00 00 00 00 00 00 00 00 00 00 e
,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 or
0 0 0 0 0 0 0 0 0 0 0 0 M
17 18 19 20 21 22 23 24 25 26 27 28
4000
2000
0
00 00 00 00 00 00 00 00 00 00 00 00 e
,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 or
0 0 0 0 0 0 0 0 0 0 0 0 M
17 18 19 20 21 22 23 24 25 26 27 28
2 Compute the average (most likely) annual profit of your 10,000 simulations of each
warehouse size, given the expected range and probabilities of demand.
3 Draw up a simple, two-line frequency table, to estimate the chances of a loss at each
warehouse size. You're just looking for the percent of the time the profit was less than
(or, technically, equal to) zero.
4 What's a safe bet for the annual profit at each size? Compute the value which, nine times
out of ten, will be exceeded at each warehouse size. That is: The chances are 90%
that the annual profit will be greater than or equal to what?
tend to construct a
o a sale-leaseback.
re foot. That will be
by a normal
ation of 20,000 for the
o standard designs it
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g in $8.00 per
ore profitable
ed "Model." I have
t each level of
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Model
square feet)
he Data Table Mean annual demand 225,000
Standard deviation 20,000
Formula for annual demand 215,920
Profit @ Profit @
Demand 175,000 s.f. 230,000 s.f.