MBA MSM X

Statistics for Management

Assignment Number: II

Group Number: 2
Contents

1. Introduction

2. Problem

3. Objectives

4. Available Data

5. Analysis and Interpretation

1. - INTRODUCTION

The difference between production and demand in a business company is always a

problem that happens frequently. Most of times, a company cannot produce in its
maximum capacity because of the demand does not requires, and at the end, an
exceeded production can make that a manager take the decision to sale the product at
lower price than cost price, just to liquidate it and try to recover the investment capital.

This time, we have the opportunity to see what happened with Avalanche Company, and
analyze the alternative of hire an external company to get you the chance of increase your
demand. Also, make a decision based on the price costs. Finally, establish different
scenarios, to analyze the sensitivity of every situation and see how things changes during
the process.

2. - PROBLEM

In this case, we believe that the main problem is that Ms. Curtis Jackson, as a Director of
production of the company, needs to define if taking an external forecast to increase the
probabilities of get best demand possible is worth, and she has to evaluate the price she is
supposed to pay really make more benefits to the company.

3. - OBJECTIVES

To analyze the sensitivity of the variation of probability, and see how affecting on
Avalanche corporations decisions.

Also, too see how it works in an optimistic situation and a pessimistic situation, and
compare with other facts how the numbers changes.

4. AVAILABLE DATA

For this case we have the following data:

 PROCESS OPTIONS COST

batch line
F.C. 475000 900000
V.C. 75 60
SALE Excess of
demanda
PRICE Prod.
125 50
E.P.C Overdemand No Extra.
75 0

CONSULTANT PERFORMANCE TABLE

ACTUAL\PREDICT P. Heavy P. Low

ED Snow Snow
Heavy Snow 0.9 0.1
Low Snow 0.25 0.75

5. - ANALYSIS AND INTERPRETATION

During the case, Avalanche Co. Assumes that the probability of the demand is in the
optimal case to sell 35000 units and they think that it is 60% probable that happen.
Otherwise, in a pessimist situation they are supposed to sell only 25000 units and it is 40%
to happen. With all the data and the analysis of these facts, we make this picture, which
represent what avalanche company expects.
 PRODUCCION

Batch: Q<28,333 Line:Q>28,333

Prob
Batch Line Line .
15000 30000 40000
Detalle
Venta $4,375,000.0 $4,375,000.0 $4,375,000.0
(Demanda) 0 0 0
Venta (Exceso) $0.00 $0.00 $250,000.00
$1,600,000.0 $2,700,000.0 $3,300,000.0
Costo Prod. 35000 0 0 0 0.60
DEMAND

$1,500,000.0
Costo Prod. Ext 0 $375,000.00 $0.00
$1,275,000.0 $1,300,000.0 $1,325,000.0
Total 0 0 0

Venta $3,125,000.0 $3,125,000.0 $3,125,000.0

(Demanda) 0 0 0
Venta (Exceso) $0.00 $250,000.00 $750,000.00
0.40
25000 $1,600,000.0 $2,700,000.0 $3,300,000.0
Costo Prod. 0 0 0
Costo Prod. Ext $750,000.00 $0.00 $0.00
Total $775,000.00 $675,000.00 $575,000.00
0.60 $765,000.00 $780,000.00 $795,000.00
0.40 $310,000.00 $270,000.00 $230,000.00
EXPECTED PROFIT
$1,075,000.0 $1,050,000.0 $1,025,000.0
0 0 0

We can see in this picture, with that probability of demand the optimist situation is to
produce 15000 units, because it gives us the best profitability comparing with the other two
options. And the worst option there is to produce 40000 units because it gives us the worst
profitability.

Also we can see that the idealistic best alternative would be to pick the 60% of 40000 units
which is $795000 and the 40% of 15000 units which is $310000. That would give us
$1105000 which the best profitability we can get. But statistically is impossible.

In the expecting profit income alternative we choose the worst 60% of 15000 units which is
$765000 and the 40% of 40000 units which is $230000. We get as result $995000 which
that means that is the worst thing can happen to Avalanche Company.
Showed this like a decision tree to get the maximum and minimum expected profit, would
be like:

$1,275,000. 0.6
00 0
$1,075,000.
00
0.4
$775,000.00 0 15,000 unt.
Max. Exp. $1,075,000.
Prft. 00
$1,300,000. 0.6
00 0
$1,050,000.
00
0.4
$675,000.00 0 30,000 unt.

$1,325,000. 0.6 Min. Exp. $1,025,000.

00 0 Prft. 00
$1,025,000.
00
0.4
$575,000.00 0 40,000 unt.

This decision tree is important because with this way, we can make a Bayesian analysis,
that can make us get better our results, or at least, make a deeply analysis, more
complete.

SNOW
PREDICTIO
N P(H) P(L)
0.90
0.54
0.6
0
0.10 0.06
HITORICAL
PROBABILIT
Y
0.25
0.1
0.4
0
 0.75 0.3

0.64 0.36

H/P(H) 0.84

L/P(H) 0.16

H/P(L) 0.17

L/P(L) 0.83

$1,275,000. 0.8 $1,075,781.

00 4 25
0.1 $1,196,875.0
$775,000.00 6 $121,093.75 0
$1,300,000. 0.8 $1,096,875.
00 4 00
0.1 $1,202,343.7 0.6
$675,000.00 6 $105,468.75 5 4
$1,325,000. 0.8 $1,117,968.7 MAX
00 4 5 Stochastic
0.1 $1,207,812.5 $1,082,000.0
$575,000.00 6 $89,843.75 0 0

$1,275,000. 0.1
00 7 $212,500.00
0.8 MIN
$775,000.00 3 $645,833.33 $858,333.33 Stochastic
$1,300,000. 0.1 $1,018,000.0
00 7 $216,666.67 0
0.8 0.3
$675,000.00 3 $562,500.00 $779,166.67 6
$1,325,000. 0.1
00 7 $220,833.33
0.8
$575,000.00 3 $479,166.67 $700,000.00
Once done the Bayesian analysis we can compare all the results and be capable of make
better choices.

RESUME

Max. Exp. Profit MAX Stochastic MAX EPI

$1,075,000.00 $1,082,000.00 $1,105,000.00

Min. Exp. Profit MIN Stochastic MIN EPI

$1,025,000.00 $1,018,000.00 $995,000.00

With all this results we can see that it is not a good idea to hire an External company to
forecast weather that costs $20000. Because, the best profits Avalanche company can get
is $7000 more than they are expecting. And that amount is lower than the price of the
forecast.

To vary the probabilities, we made our charts and got the values by modifying the values of
the cell where probability is placed.

See the next chart, probabilities of 0.9 and 0.1

15000 30000 40000

Detalle
Costo $2,700,000.0 $3,300,000.0
Prod. 35000 $1,600,000.00 0 0
$4,375,000.0 $4,375,000.0
Venta (Demanda) $4,375,000.00 0 0
Venta (Exceso) $0.00 $0.00 $250,000.00 0.90
Costo Prod. Ext 1500000 $375,000.00 $0.00
$1,300,000.0 $1,325,000.0
Total $1,275,000.00 0 0

Costo $2,700,000.0 $3,300,000.0

Prod. 25000 1600000 0 0
$3,125,000.0 $3,125,000.0
Venta (Demanda) 3125000 0 0
Venta (Exceso) $0.00 $250,000.00 $750,000.00 0.10
Costo Prod. Ext 750000 $0.00 $0.00
Total $775,000.00 $675,000.00 $575,000.00
 0.90 $1,170,000.0 $1,192,500.0
$1,147,500.00 0 0
0.10 $77,500.00 $67,500.00 $57,500.00

$1,237,500.0 $1,250,000.0
Expected Profit $1,225,000.00 0 0
Mnimo
$1,225,000.00
Mximo
$1,250,000.00

After the operations in excel, we got the following values. Based on this, we can say that
the maximum value that we can pay is $10500.00, producing 40000 units. If our approach
is pessimistic we cannot pay anything, for this last situation our production is 15000 units.
See the next excel table:

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,250,000.00 $1,270,000.00 $1,260,500.00
$10,500.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,225,000.00 $995,000.00 $1,214,500.00
-$10,500.00

We made the calculations for all the possible alternatives (+0.1) and found that in all the
cases is not a good idea pay the USD 20000 for the consulting, except in the case where
we place the values at 0.8 and 0.2. See the next chart:
 PRODUCCION
Batch: Q<28,333
Line:Q>28,333
Batch Line Line Prob.
15000 30000 40000
Detalle
Costo 3500 $2,700,000.0 $3,300,000.0
Prod. 0 $1,600,000.00 0 0
Venta $4,375,000.0 $4,375,000.0
(Demanda) $4,375,000.00 0 0
Venta (Exceso) $0.00 $0.00 $250,000.00 0.80
Costo Prod. Ext 1500000 $375,000.00 $0.00
$1,300,000.0 $1,325,000.0
Total $1,275,000.00 0 0

Costo 2500 $2,700,000.0 $3,300,000.0

Prod. 0 1600000 0 0
Venta $3,125,000.0 $3,125,000.0
(Demanda) 3125000 0 0
Venta (Exceso) $0.00 $250,000.00 $750,000.00 0.20
Costo Prod. Ext 750000 $0.00 $0.00
Total $775,000.00 $675,000.00 $575,000.00

0.80 $1,040,000.0 $1,060,000.0

$1,020,000.00 0 0
0.20 $155,000.00 $135,000.00 $115,000.00

Expected $1,175,000.00 $1,175,000.0 $1,175,000.0

Profit 0 0
Mnimo
$1,175,000.00
Mximo
$1,175,000.00

After the operations in excel, we got the following values. Based on this, we can say that
the maximum value that we can pay is $26000, producing anyone of the 3 alternatives. In
this particle case, it is a good idea pay for the consulting. If our approach is pessimistic we
cannot pay anything.

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,175,000.00 $1,215,000.00 $1,201,000.00
$26,000.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,175,000.00 $995,000.00 $1,149,000.00
-$26,000.00

See the results of each variation:

0.9 and 0.1

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,250,000.00 $1,270,000.00 $1,260,500.00
$10,500.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,225,000.00 $995,000.00 $1,214,500.00
-$10,500.00
0.8 and 0.2

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,175,000.00 $1,215,000.00 $1,201,000.00
$26,000.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,175,000.00 $995,000.00 $1,149,000.00
-$26,000.00

0.7 and 0.3

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,125,000.00 $1,160,000.00 $1,141,500.00
$16,500.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,100,000.00 $995,000.00 $1,083,500.00
-$16,500.00

0.6 and 0.4

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,075,000.00 $1,105,000.00 $1,082,000.00
$7,000.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$1,025,000.00 $995,000.00 $1,018,000.00
-$7,000.00

0.5 and 0.5

 MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$1,025,000.00 $1,050,000.00 $1,025,000.00
$0.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$950,000.00 $995,000.00 $950,000.00
$0.00
0.4 and 0.6

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$975,000.00 $995,000.00 $975,000.00
$0.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$875,000.00 $995,000.00 $875,000.00
$0.00
0.3 and 0.7

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$925,000.00 $940,000.00 $925,000.00
$0.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$800,000.00 $995,000.00 $800,000.00
$0.00

0.2 and 0.8

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$875,000.00 $885,000.00 $875,000.00
$0.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$725,000.00 $995,000.00 $725,000.00
$0.00
0.1 and 0.9

MAXI EXPECTED
PROFIT EP MAX EPI Max ESS
$825,000.00 $830,000.00 $825,000.00
$0.00

MIN EXPECTED PROFIT

EP MIN EPI Min ESS
$650,000.00 $995,000.00 $650,000.00
$0.00

Once we made the analysis of each possibility, we group the results of each possibility in a
chart, with the purpose of analyzing the result by graphic, We could note that variation is
not much, but in the possibilities between 0.6 and 0.9, there is a difference between
expected profit and stochastic, these points are the only that allow us to pay for a
consultant.

Optimistic Graph

$1,300,000.00

$1,100,000.00
EXP. PROFIT
STOCHASTIC

$900,000.00

$700,000.00
0 0.10.20.30.40.50.60.70.80.9 1

Pessimistic Graph
$1,300,000.00

$1,200,000.00

$1,100,000.00

$1,000,000.00

$900,000.00 EXP. PROFIT

STOCHASTIC
$800,000.00

$700,000.00

$600,000.00

$500,000.00
0 0.10.20.30.40.50.60.70.80.9 1