DECISION MODELING
WITH
MICROSOFT EXCEL
Chapter 2
Spreadsheet Modeling
Part 1
Copyright 2001
Prentice Hall Publishers and
Ardith E. Baker
In building spreadsheets for deterministic
models, we will look at:
ways to translate the black box representation
into a ____________ model.
recommendations for good spreadsheet model
____________and layout
suggestions for _____________ your models
useful features of Excel for modeling and
____________
Example 1: Simon Pie
Two ingredients combine to make Apple Pies:
Fruit and frozen dough
The Pies are then processed and sold to local grocery
stores in order to generate a ____________ .
Follow the three steps of model building.
Step 1: Study the ____________ and Frame the
Situation
Critical Decision: Setting the wholesale pie price
Decision Variable: Price of the apple pies
(this plus cost parameters will determine profits)
Step 2: Formulation
Using “Black Box” diagram, specify _____ parameters
Pie Price
Unit Cost, Filling
Unit Cost, Dough
Unit Pie Processing Cost
Fixed Cost
Model
The next step is to develop the logic inside the black box.
A good way to approach this is to create an __________
Diagram.
An Influence Diagram pictures the connections between the
model’s _________________ and a performance measure
(e.g., profit).
To create an Influence Diagram:
start with a performance measure___________.
Decompose this variable into two or more __________
variables that combine mathematically to define the
value of the performance measure.
Further decompose each of the intermediate variables
into more ________ intermediate variables.
Continue this process until an ___________ variable is
defined (i.e., until you define an input decision variable
or a parameter).
Start here:
Profit
performance
measure
variable
Decompose this variable into the intermediate variables
_________ and _________
Profit
Revenue
Total Cost
Now, further decompose each of these intermediate
variables into more related intermediate variables ...
Profit
Total Cost
Revenue
Processing
Cost
Ingredient
Cost
Required
Ingredient
Quantities
Pies Demanded
Pie Price
Unit Pie
Processing Cost
Unit Cost
Filling
Unit Cost
Dough
Fixed Cost
Step 3: Model Construction
Based on the previous Influence Diagram, create the
________ relating the variables to be specified in the
spreadsheet.
Profit
Revenue
Total Cost
Profit = _________ – Total Cost
Profit
Revenue
Revenue = Pie Price * Pies _____________
Pies Demanded
Pie Price
Profit
Total Cost
Processing
Cost
Ingredient
Cost
Total Cost =
Processing Cost + Ingredients Cost +_________
Fixed Cost
Profit
Total Cost
Processing
Cost
Pies Demanded
Unit Pie
Processing Cost
Processing Cost =
Pies Demanded *
_____ Pie Processing Cost
Profit
Total Cost
Ingredients Cost =
Qty Filling * Unit Cost _________ +
Qty Dough * Unit Cost _________
Ingredient
Cost
Required
Ingredient
Quantities
Unit Cost
Filling
Unit Cost
Dough
Simon’s Initial Model Input Values
Pie Price
$8.00
Pies Demanded and sold
16
Unit Pie Processing Cost ($ per pie)
$2.05
Unit Cost, Fruit Filling ($ per pie)
$3.48
Unit Cost, Dough ($ per pie)
$0.30
Fixed Cost ($000’s per week)
$12
To represent this model in an Excel Spreadsheet,
you should adhere to the following recommendations:
Present _______ variables together and label them.
Clearly label the model _________.
Give the __________________ where appropriate.
Store ______________ in separate cells as data and
refer to them in formulas by cell references.
Use bold fonts, cell indentations, cell underlines and
other Excel ________________ options to facilitate
interpretation.
Initial Simon Pie Weekly Profit Model
(Click on spreadsheet to open Excel)
“What if?” Projection
Allows you to determine what would happen if you used
______________ 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 ________ of these parameters in
the spreadsheet to view the resulting Profit.
What if we change the
values of two parameters?
What effect will that have
on Total Cost and Profit?
Refining the Model
After reviewing the results, Simon has determined that
this model treats the variables Pie Price and Pies
Demanded as if they were ___________ of each other.
Knowing this is not the case, Simon developed the
following mathematical (___________) relationship:
Pies Demanded = 48 – 4 * Pie Price ($0 < price < $12)
Pie Demand
Demand as a function of Price
50
40
30
20
10
0
0
2
4
6
Pie Price
8
10
12
Refining the Model
Now, modify the __________________ to include this
relationship. Keep in mind that the physical results
should be ______________ from the financial or
economic results.
More “What if?”
You can copy the model into ____________ columns
and change specific values in order to compare and
contrast the changes.
More “What if?”
Using Excel’s_______________, the resulting changes
can be graphed in an X-Y Scatter plot for viewing.
Note that Profit is largest at a Pie Price of about $9.00
and that the __________ point of zero occurs at about $6.25.
Sensitivity Analysis
Examines what happens to one variable (usually a
_____________ variable) when you change the values of
another variable (usually an __________ variable).
For example, examine the effect of a percentage change in
Pie Price on the percentage change in Profit.
Now you can use __________________ to determine how much of one
performance measure (Profit) must be sacrificed to achieve a given
improvement in another performance measure (Pies Demanded & Sold).
Example 2: Simon Pie Revisited
Simon suspects that the previous model’s ___________
formula produces the correct historical cost for the
base case of 12 thousand Pies Demanded, but not for
other values of Pies Demanded.
___________ the model by using actual Processing Cost
data for different levels of pie production.
Use Excel’s ____________ capability to fit a trend
equation directly to the actual cost data.
First, ___________ data (column B) are plotted along with
projected data (column C) based on the initial model of
2.05*Pies Demanded (column A)
Next, right-click on the Processing Cost (Actual) ______
in the graph and choose the option Add Trendline.
After clicking this option, a
dialog will open in which you
can select _________as the
Type (for simplicity) and
Processing Cost (Actual) as
the Based on Series.
Next, click on the _______
tab and select Custom as
the Trendline Name. This
will allow you to enter Linear
Fit. Finally, click on the
Display equation on chart
option and click OK.
The resulting ___________ gives a much better fit to the
Processing Cost data and provides a more accurate
equation:
Processing Cost = 3.375*Pies Demanded and Sold – 14.339
“What if?” Projection
Applying this new Processing Cost equation to the spreadsheet model, you can see what will happen to your Profit.
Sensitivity Analysis
As in the previous example, use _________ analysis to
determine what would happen to Profit if you change
the values of Pie Price and Pies Demanded $ Sold.
Sensitivity Analysis
Again, using Excel’s Chart Wizard, the resulting
changes can be __________ in an X-Y Scatter plot
for viewing.
Printing and Displaying the Spreadsheet Models
Note that you can ____ and display these spreadsheet
models such that technically oriented __________ can
be hidden from higher level management reports.
To do this,
highlight the
desired rows
and then click
on the _____
pull down menu
and choose the
Group and
Outline – Group
option.
Printing and Displaying the Spreadsheet Models
When the ______ option is in effect, you will see a “-”
button on the left side of the spreadsheet.
Clicking on this button will _________, i.e., hide those
rows from display and printing.
Printing and Displaying the Spreadsheet Models
While in this “hide” mode, a “+” button will be displayed
on the left side of the ________________.
Clicking on this button will reveal the rows for modeling
and analysis.
NOTE: Collapsing cells which comprise a ___________ in
an Excel chart will temporarily remove the series from the
chart.
Modeling using Time Intervals
Columns in a spreadsheet may be designated as time
______________(in this case weeks). With a Total
column summarizing the time periods.
End of Part 1
Please continue to Part 2