Risk Analysis for a New Product Launch

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).

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. Please refer to the Appendix in Camm Ch11 on page 550 for further details on the Gamma Distribution.

Part B (Spreadsheet Simulation)

Develop a spreadsheet simulation model to estimate the most likely (i.e. the mode) profit, the expected (i.e. the average) profit, and the probability that the project will result in a loss.

1.Submit your spreadsheet simulation model as an attachment.

2.Provide a histogram of the demand distribution as an attachment.

3.Conduct some background research to provide an explanation as to why the Gamma Distribution is commonly used to model consumer demand in cases such as this.

4.Simulate 20 replications/iterations to provide an estimate the mode of profit. Is this estimate consistent with the base-case from Part A?

5.Simulate 20 replications/iterations to provide an estimate of the expected profit.