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188 Applying simulation to decision problems
Probability
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8 10 12 14 16 18 10 15 20 25 30 100150200250 300
Variable costs ($) Sales (thousands of plates) Fixed costs ($000)
Figure 7.3 – Probability distributions for variable costs, sales and fixed costs
use more sophisticated statistical methods, like correlation and multiple
regression analysis, to obtain the diagram.)
Stage 4: Assess probability distributions
Figure 7.3 shows the probability distributions which were obtained for
variable costs, sales and fixed costs. Techniques for eliciting probability
distributions are discussed in Chapter 10.
Stage 5: Perform the simulation
Simulation can now be used to obtain a probability distribution for the
profit which the plate will earn. A microcomputer was programmed to
carry out the simulation which involved the generation of three random
numbers. The first was used to give a figure for variable costs, the second
a figure for sales and the third a figure for fixed costs. For example, in the
first simulation the computer produced variable costs of $13.2, sales of
26 500 and fixed costs of $125 000, and the resulting profit was calculated
as follows:
Profit = ($25 − $13.2) × 26 500 − $125 000 = $187 700
This process was then repeated until 500 simulations had been carried
out. The profits generated by these simulations and the resulting
probability distribution are shown below:
Probability
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