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186 Applying simulation to decision problems
because of increased pressure on the workforce. Similarly, fixed costs
may only remain at a particular level up to a certain number of sales
when new equipment and machinery may be required. However, if
we tried to include every possible factor and relationship in the model
it would become too complicated to handle and the valuable insights
which can be gained by building and analyzing the model might be lost.
Therefore a balance has to be struck between the need to keep the model
simple and understandable and the need to provide a reasonable and
plausible representation of the real problem.
Stage 3: Preliminary sensitivity analysis
Although we may be uncertain about the values which the factors might
assume, this uncertainty may not be important in the case of all the
factors. For example, we might find that there would be little change in
profit if fixed costs changed from their lowest to their highest possible
value. If this were the case then it would clearly be a waste of effort if
time was spent in eliciting a probability distribution for fixed costs: the
use of a single figure representing the most likely value would suffice.
Sensitivity analysis can therefore be helpful at this stage in screening
out those factors which do not require a probability distribution. This
analysis can be carried out as follows:
(i) Identify the lowest, highest and most likely values that each factor
can assume.
The values put forward for the factors in Elite’s problem are
shown in Table 7.4. (It is assumed that the price of the plate will be
fixed at $25 so there is no uncertainty associated with this factor.)
(ii) Calculate the profit which would be achieved if the first factor was
at its lowest value and the remaining factors were at their most
likely values.
Table 7.4 – Estimates of lowest, highest and most likely values for the Elite
Pottery problem
Factor
Most likely
value
Lowest possible
value
Highest possible
value
Variable costs $13 $8 $18
Sales 22 000 units 10 000 units 30 000 units
Fixed costs $175 000 $100 000 $300 000