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Problem Set 1 - Basics of Spreadsheet Modeling

This document provides details for 4 problems to model using spreadsheets: 1) Determining the optimal price for a product given costs and estimated sales 2) Modeling hotel room pricing and occupancy for an F1 race event 3) Modeling advertising spending and demand for picnic tables and chairs at a woodworking shop 4) Modeling advertising budget allocation and sales across quarters for a consumer product For each problem, instructions are given to create influence diagrams, black box diagrams, model designs, and build spreadsheet models.

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Ritabhari Banik Roy
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167 views2 pages

Problem Set 1 - Basics of Spreadsheet Modeling

This document provides details for 4 problems to model using spreadsheets: 1) Determining the optimal price for a product given costs and estimated sales 2) Modeling hotel room pricing and occupancy for an F1 race event 3) Modeling advertising spending and demand for picnic tables and chairs at a woodworking shop 4) Modeling advertising budget allocation and sales across quarters for a consumer product For each problem, instructions are given to create influence diagrams, black box diagrams, model designs, and build spreadsheet models.

Uploaded by

Ritabhari Banik Roy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem Set 1: Basics of Spreadsheet Modelling


(Influence Diagrams, Black Box Diagrams, Model Design, Basic Spreadsheet
Modeling)
1. Pricing Decision
We are trying to determine the price we should set for our product for the coming
year. Our fixed costs are $150, unit cost is $2 and it is estimated that 1500 units of
our product will be sold in the coming year.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build the spreadsheet model.

2. F1 Night City Race


The Formula 1 car race is coming to town. This is the first time the race is held in a
city street at night. This will help to boost tourism for a short while and increase the
city's global visibility. To help defray the massive costs in hosting the race, the city's
tourism authority is going to levy a 30% service charge on all hotel rooms for the 5-
day duration before and during the race. The overall estimation is that hotels can
charge up to three times their usual rate for each room and still see full occupancy.
Hotel general manager Tom Hawkes wants to understand the situation better before
he makes the decision on pricing. He is skeptical that room occupancy will be full
at such high room rates. The fixed cost and the unit variable costs are respectively
$100 and $10.
a. Draw the influence diagrams and the black box diagrams for the problem for two
cases: i) price inelastic demand and ii) price elastic demand.
b. Prepare the model design for both cases (i) and (ii) above.
For case (i) assume an occupancy rate of 70%.
For case (ii), assume that: 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 = 1.7 – 0.00175 × 𝑅𝑜𝑜𝑚 𝑟𝑎𝑡𝑒.
c. Build the spreadsheet model in both cases.
3. Bob’s Woodworking Shop
Bob owns a woodworking shop where he builds picnic tables and Muskoka chairs.
He charges $250 for each picnic table and $80 for each Muskoka chair. It costs him
$105 in materials and $50 in labour to build a picnic table. It costs him $30 in
materials and $30 in labour to build a Muskoka chair. Demand for picnic tables is
relatively constant at 30 tables per summer season. Demand for Muskoka chair
increases with his investment in advertising. Based on his past experience, he
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believes that the relationship between advertising and demand for Muskoka chairs
is as follows:
125
𝐷𝑒𝑚𝑎𝑛𝑑 =
1 + 5𝑒 −0.005×𝐴𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔 𝑆𝑝𝑒𝑛𝑑
Bob wants to decide how much he should invest in advertising.
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the model design for this problem.
c. Build a spreadsheet model. You can use the base case advertising spend to be
$100.
d. What are the demands for Muskoka chairs and profits when advertising
investment is i) $0, ii) $250, iii) $400 and iv) $500?

4. The Advertising Budget Decision


As product-marketing manager, one of our jobs is to prepare recommendations to
the Executive Committee as to how advertising expenditures should be allocated.
Last year’s advertising budget of $40,000 was spent in equal increments over the
four quarters. Initial expectations are that we will repeat this plan in the coming year.
However, the committee would like to know whether some other allocation would
be advantageous and whether the total budget should be changed.
Our product sells for $40 and costs us $25 to produce. Sales in the past have been
seasonal and our consultants have estimated seasonal adjustment factors for unit
sales as follows:
Q1: 90%; Q2: 110%; Q3: 80%; Q4: 120%
(A seasonal adjustment factor measures the percentage of average quarterly demand
experienced in a given quarter.)
In addition to production costs, we must take into account the cost of the sales force
(projected to be $34,000 over the year, allocated as follows: Q1 and Q2, $8,000 each;
Q3 and Q4, $9,000 each), the cost of advertising itself, and overhead (typically
around 15% of revenues). Clearly, advertising will increase sales, but there are limits
to its impact. Our consultants several years ago estimated the relationship between
advertising and sales. Converting that relationship to current conditions gives the
following formula:
𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 35 × 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 × √(3,000 + 𝐴𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔)
a. Draw the Influence Diagram and the Black Box Diagram for this problem.
b. Prepare the layout of the spreadsheet model for this problem.
c. Build a spreadsheet model to help make the decision.

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