(Problem has been adapted from Camm Ch11, Problem 3, on page 535) - Textbook: Business Analytics (3rd Edition).

The management of Madeira Computing is considering the introduction of a wearable electronic device with the functionality of a phone. The fixed cost to launch this new product is $300,000. The variable cost for the product is expected to be between $160 and $240, with a most likely value (mode) of $200 per unit. The product will sell for $300 per unit. Demand for the product is expected to range from 0 to approximately 20,000 units, with 4,000 units being the most likely (i.e. the mode). As noted by Camm (Ch 11.1, p 502) When making a decision in the presence of uncertainty, the decision maker should be interested not only in the average, or expected, outcome, but also in information regarding the range of possible outcomes. In particular, decision makers are interested in risk analysis, that is, quantifying the likelihood and magnitude of an undesirable outcome. Cost Distribution: Assume that the variable cost can be well-approximated by a uniform random variable with a minimum of $160 and a maximum of $240. Demand Distribution: Assume that the product demand can be well-approximated as 1,000 times the value of a gamma random variable with an alpha parameter of 3 and a beta parameter of 2.

Qsn1 - A Scenario Analysis

To assess risk, construct a spreadsheet to computing profit for this product in the base-case, worst-case, and best-case scenarios. (Note that the base-case scenario should be constructed from the modes of the cost and demand distributions, respectively.)

A. What is the profit corresponding to the base-case?

B. What is the profit corresponding to the worst-case?

C. What is the profit corresponding to the best-case?

D. Briefly discuss any initial perceptions you may have of how probable each of these cases are likely to be in practice.