1. Spreadsheet Models - DSS Basic Profit Models What-if, Sensitivity Analysis

2. Lecture Objectives You should be able to : 1.Analyze a business situation and draw an influence diagram. 2.Build basic profitability models on a spreadsheet. 3.Perform what-if, sensitivity analyses.

3. Breakeven Analysis Consider a relatively simple situation: Sally owns a motel with a hundred rooms. Fixed daily cost is $1000 (includes mortgage, staff salaries, maintenance). Variable cost per room is $10 per day (includes extra utility cost, room cleanup, etc). At a fixed room price of $50 per day, what is the breakeven point? Draw an influence diagram leading up to your profit. Compute the breakeven point.

4. Influence Diagram The boxes that cannot be split any further (for this simple example) are the basic inputs for the analysis. How is Number of Rooms Rented different from the rest of the inputs? Are there any other dependencies that are not shown above?

5. Breakeven Analysis Price50 FC1000 VC/unit10 Rooms5101520253035404550 Rev2505007501000125015001750200022502500 FC1000 VC50100150200250300350400450500 Tot Cost1050110011501200125013001350140014501500 Profit-800-600-400-20002004006008001000

6. Breakeven Point

7. Crossover Point You have the option of subcontracting to improve room quality and the surroundings, but that would increase fixed costs to $1800, with no change to variable costs. You will, however, be able to charge $70 per room per day. At what point will you be indifferent between your current mode of operation and the new option?

8. Crossover Analysis – Point of Indifference Case 1Case 2 Price5070 FC10001800 VC/unit10 Case 1 Rooms20406080100 Rev10002000300040005000 FC1000 VC2004006008001000 Tot Cost12001400160018002000 Profit-200600140022003000 Case 2 Rooms20406080100 Rev14002800420056007000 FC1800 VC2004006008001000 Tot Cost20002200240026002800 Profit-600600180030004200

9. Crossover Analysis

10. Pricing Analysis – Demand Function If the demand for rooms depends on the price as follows: Quantity Demanded = 200 - 3*price, what price should Sally charge for a room? Assume Fixed Cost is still $1000 per day and Variable cost is $10 per day per room. 1.Determine the Goal. 2.How would Sally get such a demand equation for her business? 3.Determine the best price to help her reach her goal.

11. Price and Profit Pricing Strategy Example Max Rooms100 FC 1000 Demand = 200 - 3*p VC/unit10InterceptSlope 2003 Price01020304050607080 Rooms Demanded200170140110805020-10-40 Rooms Rented100 80502000 Rev010002000300032002500120000 FC1000 VC1000 80050020000 Tot Cost2000 1800150012001000 profit-2000-100001000140010000-1000 What is the best price?

12. Profit Vs. Price

13. Sensitivity Analysis If the estimate of Variable Costs ($10 per room per day) is inaccurate, how does it affect the solution? Pricing Strategy Example Price50 FC1000 VC/unit10 Rooms 50 Rev2500 FC1000The table below shows profits at different prices and variable costs VC500 Tot Cost1500Prices per room profit1000 30354045505560 71300166016401470115068060 81200156515601405110064540 91100147014801340105061020 VC 10100013751400127510005750 11900128013201210950540-20 12800118512401145900505-40 13700109011601080850470-60

14. Sensitivity to Variable Costs

15. Extend the Analysis How would this entire analysis change if you were analyzing a larger hotel like the Marriott instead of a motel?