The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for a new product. The selling price for the product will be $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows: Procurement Cost ($) Probability Labor Cost ($) Probability Transportation Cost ($) Probability 10 0.2 18 0.25 2 0.74 12 0.35 20 0.35 5 0.26 13 0.45 22 0.1 25 0.3 Compute profit per unit for the base-case, worst-case, and best-case scenarios.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for a new product. The selling price for the product will be $45 per unit. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows:
| Procurement Cost ($) |
Probability |
Labor Cost ($) |
Probability |
Transportation Cost ($) |
Probability |
| 10 | 0.2 | 18 | 0.25 | 2 | 0.74 |
| 12 | 0.35 | 20 | 0.35 | 5 | 0.26 |
| 13 | 0.45 | 22 | 0.1 | ||
| 25 | 0.3 |
- Compute profit per unit for the base-case, worst-case, and best-case scenarios.
Profit per unit for the base-case: $ fill in the blank 1
Profit per unit for the worst-case: $ fill in the blank 2
Profit per unit for the best-case: $ fill in the blank 3 - Construct a simulation model to estimate the mean profit per unit. If required, round your answer to the nearest cent.
Mean profit per unit = $ fill in the blank 4 - Why is the simulation approach to risk analysis preferable to generating a variety of what-if scenarios?
The input in the box below will not be graded, but may be reviewed and considered by your instructor. - Management believes the project may not be sustainable if the profit per unit is less than $5. Use simulation to estimate the probability the profit per unit will be less than $5. If required, round your answer to one decimal place.
fill in the blank 6%
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