# Decision Making Model

• Nov 17th 2013, 08:41 PM
jlsmith1003
Decision Making Model
Given:

Management has asked you to help estimate the average cost per unit to produce a new product so that they can project profits at different selling prices. You will conduct a Monte Carlo simulation for cost behavior using provided probabilistic data for the following cost estimates. Cost per unit for materials, labor, and utilities and their probability distributions are provided in the attached worksheet. In your calculations, round to the nearest cent.

Materials:
• The probability is .18 that the cost will be \$33.
• The probability is .23 that the cost will be \$35.
• The probability is .32 that the cost will be \$38.
• The probability is .27 that the cost will be \$39.

Labor:
• The probability is .12 that the cost will be \$22.
• The probability is .18 that the cost will be \$23.
• The probability is .22 that the cost will be \$24.
• The probability is .28 that the cost will be \$25.
• The probability is .20 that the cost will be \$28.

Utilities:
• The probability is .26 that the cost will be \$3.
• The probability is .43 that the cost will be \$4.
• The probability is .31 that the cost will be \$6.

A. Complete the attached “Simulation Template” to determine the following costs (responses should include two decimal places):
1. Average materials cost per unit
2. Average labor cost per unit
3. Average utilities cost per unit
4. Average total cost per unit

Note: Run 10 trials using the random numbers that are provided on the “Simulation Template” for each probability distribution. Use the random numbers in the exact sequence that they appear on the template for each cost.

B. Determine the selling price per unit that should be established for this product using your simulation results and assuming that the company wants to realize an average markup of \$20 on each unit sold.

 Materials Labor Utilities Total Random Cost Random Cost Random Cost Cost Trial Number per Unit Number per Unit Number per Unit per Unit 1 28 21 85 2 14 50 64 3 44 90 15 4 51 71 66 5 91 10 45 6 38 11 74 7 79 70 62 8 70 16 18 9 98 88 74 10 11 ________ 67 ________ 35 ________ ________ Total Average