DSC Slides 2b: How to create an Influence Diagram: start with a performance measure variable. Further decompose each of the intermediate variables into more related intermediate variables. Decompose this variable into two or more intermediate variables that combine mathematically to define the value of the performance measure. Continue this process until an exogenous variable is defined (i.e., until you define an input decision variable or a parameter).

DSC TVC TFC Unit VC RevenueDemand Price Total Cost Profit Advertising An Example Influence Diagram

DSC performance measure variable Profit Start here: Decompose this variable into the intermediate variables Revenue and Total Cost Example: Simon Pie

DSC Profit Revenue Total Cost Now, further decompose each of these intermediate variables into more related intermediate variables...

DSC Model Construction Based on the previous Influence Diagram, create the equations relating the variables to be specified in the spreadsheet.

DSC Profit Revenue Total Cost Profit = Revenue – Total Cost

DSC Profit Revenue Pie Price Pies Demanded Revenue = Pie Price * Pies Demanded

DSC Fixed Cost Processing Cost Ingredient Cost Profit Total Cost Total Cost = Processing Cost + Ingredients Cost + Fixed Cost

DSC Processing Cost = Pies Demanded * Unit Pie Processing Cost Processing Cost Total Cost Pies Demanded Unit Pie Processing Cost Profit

DSC Ingredients Cost = Qty Filling * Unit Cost Filling + Qty Dough * Unit Cost Dough Ingredient Cost Profit Total Cost Unit Cost Filling Unit Cost Dough Required Ingredient Quantities

DSC Profit Revenue Total Cost Pies Demanded Pie Price Unit Pie Processing Cost Fixed Cost Processing Cost Ingredient Cost Unit Cost Filling Unit Cost Dough Required Ingredient Quantities

DSC Simon’s Initial Model Input Values Pie Price Pies Demanded and sold Unit Pie Processing Cost ($ per pie) Unit Cost, Fruit Filling ($ per pie) Unit Cost, Dough ($ per pie) Fixed Cost ($000’s per week) $ $2.05 $3.48 $0.30 $12

DSC To represent this model in an Excel Spreadsheet, you should adhere to the following recommendations: Present input variables together and label them. Clearly label the model results. Give the units of measure where appropriate. Store parameters in separate cells as data and refer to them in formulas by cell references. Use bold fonts, cell indentations, cell underlines and other Excel formatting options to facilitate interpretation.

DSC Initial Simon Pie Weekly Profit Model (Click on spreadsheet to open Excel)

DSC “What if?” Projection Allows you to determine what would happen if you used alternative inputs. For example, what would the resulting Profit be if the Profit for Pie Price and Pies Demanded changed to $7.00 and 20,000 or $9.00 and 12,000, respectively. Simply change the values of these parameters in the spreadsheet to view the resulting Profit.

DSC What if we change the values of two parameters? What effect will that have on Total Cost and Profit?