Problem Set 1: Basics of Spreadsheet Modelling

(Influence Diagrams, Black Box Diagrams, Spreadsheet Layout, Building Basic Models)

1. Hogwarts Express
The Hogwarts Express running between King’s Cross and Hogwarts has a capacity of 250
wizards.
The Magical Transportation Co. sold 270 tickets for the train at a price of 300 wizard dollars per
ticket. Tickets are nonrefundable. The variable cost of carrying a passenger (mostly food costs and
fuel costs) is 30 wizard dollars per passenger. If more than 250 wizards show up for the train, the
train is overbooked, and the Magical Transportation Co. must pay overbooking compensation of
350 wizard dollars per wizard to each overbooked wizard.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build the spreadsheet model to evaluate Magical Transportation Co.’s profit based on the
number of customers who show up for the journey.

2. Harold’s Product Launch

Harold owns a playground fabrication company called Play Inc. He is considering whether or
not to expand his business with a new product line of tire swings shaped like animals. He
expects to sell each swing at a price of $80. The materials to make each swing will cost $10. He
expects that it will take three hours of labour to make each swing at $15 per hour. Storing tires
requires a special storage facility with special insurance because of the risk of fire. Harold
estimates that the storage facility and insurance will cost $1200 per month. In the first year,
Harold expects to sell 500 units. He expects sales to be fairly constant at 750 units every year
after that. Should Harold launch this new product line?
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 the spreadsheet model to help Harold make the decision.

3. Penny Blossoms
Penny has started a new business of selling rhinestone hairclips called Penny Blossoms. Each
Penny Blossom costs $3.50 to make. She sells each Penny Blossom at a full price of $6. Full-
price demand may change. The first 40 leftover Penny Blossoms are sold for $2. The remaining
leftover Penny Blossoms are sold for $0.50. Penny wants to calculate the profit.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build the spreadsheet model to help Penny calculate the profit.

4. The Magical Menagerie

The Magical Menagerie sells rare and exotic owls to wizards. The shop usually sells each owl for
$25. Due to the uncertainty of demand, it has two suppliers who offer two different prices. The
low-cost supplier can supply a maximum of 50 owls per month at $5 per owl. Beyond this
demand, the shop must ask his second supplier who can provide seemingly unlimited number
of owls at
$10 per owl. Magical Menagerie wants to calculate its profit.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build the spreadsheet model to help Magical Menagerie calculate the profit.
d. How much profit does it make when it sells i) 30 owls, ii) 70 owls?

5. XYZ Drug Co.

A major drug company, XYZ, is trying to decide the correct plant capacity for a new drug. A
unit of annual capacity can be built for a cost of $10. Each unit of the drug sells for $12 and
incurs variable costs of $2. The drug will be sold for 10 years. The company is interested in
finding out its 10-year profit given the chosen annual capacity level and the annual demand
for the drug. Assume demand for the drug is the same each year. You can ignore the time value
of money in this problem.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build the spreadsheet model to help XYZ Co.

6. SwimSkin Co.’s New Product Launch

SwimSkin Co. is planning to bring to market a new swimwear called the SwimEdge. SwimSkin’s
VP of marketing, Richard Rayburn, wants to perform breakeven and sensitivity analysis before
introducing SwimEdge. These analyses will help SwimSkin set the price for SwimEdge. The sales
group estimates that it could sell about 3000 units of SwimEdge at a selling price of $129.95 per
unit if SwimSkin spends $75000 on marketing this new product. Richard collects estimates of cost
and expense data as follows:
• Variable manufacturing costs: $75.75 per unit
• Distribution costs: $5.00 per unit
• Fixed manufacturing costs: $52000
• Selling and admin costs: $18000
Richard decides to ignore the effect of taxes, for now.
a. Draw the influence diagram and the black box diagram for this problem.
b. Prepare the model design.
c. Build a spreadsheet model to help Richard evaluate the sales revenue, contribution margin, and
income before taxes. Note that the contribution margin is calculated by subtracting variable
expenses from sales and represents the amount of revenue that contributes to covering the fixed
expenses of a company.

7. Rita’s Teak Furniture Shop

Rita owns a teak furniture shop. She is considering three promotional strategies for the coming
month.
Option A: Newspaper advertisements for a big sale in which everything in the store is 15% off.
Option B: A promotional spot on the local television network, The Home Network, focused on
re- styling your dining space.
Option C: No investment in any new promotional activities.
If she goes with Option C, Rita expects to sell five bedroom sets, three dining room sets, four
china cabinets and eight patio sets. Rita sells bedroom sets for $4,500, dining room sets for
$3,500, china cabinets for $4000 and patio sets for $1,500. The furniture sold at Rita’s store is of
top quality. She purchases bedroom sets for $2,500, dining room sets for $2,000, china cabinets
for $2,000 and patio sets for $750. Her business has monthly fixed costs of Operations and
Salaries totaling
$20,000. Advertising in the newspaper costs $3,000, but two years ago when she used this
strategy, she sold one more bedroom set, two more dining room sets, no increased amount of
china cabinets and six more patio sets than she had expected. A promotional spot in The Home
Network costs
$4,000 and as a result, Rita expects that she will be able to sell four more dining room sets and
three additional china cabinets.
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 Rita make the decision.

8. 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. 3 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

formula: 𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒𝑠

advertising and sales. Converting that relationship to current conditions gives the following

= 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 the base case spreadsheet model to help make the decision.

9. 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, during the race, the city's tourism authority is
going to levy a charge on hotels and this charge is 30% of the revenue. 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. Assume that there are 100
𝑜𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 = 1.7 – 0.00175 × 𝑅𝑜𝑜𝑚 𝑟𝑎𝑡𝑒.
rooms available with Hawkes. Considering the following two cases: i) occupancy is 80% and ii)

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 the base case spreadsheet model to help make the decision.

10. Honeydukes Co.

Honeydukes Co. is a food-processing firm that purchases surplus grapes from grape growers, dries
them into raisins, applies a layer of sugar, and sells the sugar-coated raisins to major cereal and
candy companies. At the beginning of the grape-growing season, Honeydukes has two decisions
to make: 1) how many grapes to buy under contract and 2) how much to charge for the sugar-
coated raisins it sells.
In the spring, Honeydukes typically contracts with a grower who will supply a given amount of
grapes in the autumn at a fixed cost of $0.25 per pound. The balance between Honeydukes’
grapes requirements and thosesupplied by the grower must be purchased in the autumn in the open
market at a price that could vary between $0.25 per pound to $0.35 per pound. Honeydukes,
however, cannot sell grapes on the open market in autumn if it has a surplus in inventory because
it has no distribution system for such purposes.
The other major decision facing Honeydukes is the price to charge for sugar-coated raisins.
Honeydukes has several customers who buy its output in price-dependent quantities. Honeydukes
negotiates with these processors as a group to arrive at a price for the sugar-coated raisins and the
quantity to be bought at that price. The negotiations happen in spring, long before open market
price of grapes is known. Based on experience, Ambrosius Flume, Honeyduke’s general manager,
believes that if Honeydukes prices the sugar-coated raisins at $2.20 per pound, the processors’
orders will total 750,000 pounds of sugar-coated raisins. This total will increase by 15,000 pounds
for each penny reduction in sugar-coated raisin price below $2.20. The same relationship holds in
the other direction: demand will drop by 15,000 for each penny increase. The price of $2.20 is a
tentative starting point in the negotiation.
Sugar-coated raisins are made by washing and drying grapes into raisins, followed by spraying
the
raisins with a sugar coating that Honeydukes buys for $0.55 per pound. It takes 2.5 pounds of
grapes and 0.05 pound of coating to make one pound of sugar-coated raisins, the balance being
water that evaporates during grape drying. In addition to the raw material cost for the grapes and
the coating, Honeydukes’ processing plant incurs a variable cost of $0.20 to process one pound of
grapes into raisins, up to its capacity of 1,500,000 pounds of grapes. For volumes above 1,500,000
pounds of grapes, Honeydukes outsources grapes processing to another food processor which
charges $0.45 per pound. This price includes just the processing cost, as Honeydukes supplies
both the grapes and the coating required. Honeydukes also incurs fixed costs in its grape -
processing plant of $200,000 per year.
Ambrosius Flume has asked you to analyze the situation to guide him in the upcoming
negotiations. His ultimate goal is to examine the effect of various scenarios on Honeydukes’
profits. As a basis for further analysis, he suggests using a contract purchase price of $0.25 with a
supply quantity of 1 million pounds from the grower, along with a selling price of $2.20 for
sugar-
coated raisins. He is mainly interested in evaluating annual profit (before taxes). He believes that
the openmarket grape price will most likely be $0.30.
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 the base case spreadsheet model to help Ambrosius Flume.