INTRODUCTORY SIMULATION EXERCISES Construct a spreadsheet model for each of the following exercises and then use the model to build a simulation model.

a. Jason Enterprises faces uncertain future sales. Specifically, for the coming year, the firm’s CFO described her sales expectations as follows: “Sales could be as high as

$10,000,000 or as low as $7,000,000, but I could not tell you anything more.” How would you characterize firm sales using a probability distribution? If Jason’s operating earnings are typically 25% of firm sales, what would you estimate earnings to be for next year? Construct a spreadsheet model and incorporate consideration for the uncertainty in future revenues to estimate the expected gross profit for the firm.
. In the spring of 2010, Aggiebear Dog Snacks Inc. was estimating its gross profits (revenue less cost of goods sold) for 2011. The firm’s CFO had recently attended a two-day seminar on the use of simulation and asked his analyst to construct a simulation model to make the estimate. To help guide the analyst, the CFO prepared the following table:
Income Statement Variable Description Revenue Minimum = $18 million; most likely = $25 million; maximum = $35 million Cost of goods sold 70% to 80% of revenue i. Construct a spreadsheet model for Aggiebear’s gross profit.
ii. Use the information provided above to convert your spreadsheet model into a simulation model.
iii, Run your simulation model 10,000 iterations. What is the expected level of gross profit for 2011? What is the probability that the gross profit will fall below $3.5 million?