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528 CHAPTER 12 SIMULATION

a. What is the mean profit for the simulation?
b. What is the probability the project will result in a loss?
c. What is your recommendation concerning the introduction of the product?
10 A building contractor is preparing a bid on a new construction project. Two other
contractors will be submitting bids for the same project. Based on past bidding
practices, bids from the other contractors can be described by the following probability
distributions:

Contractor Probability Distribution of Bid
A Uniform probability distribution between E600 000 and E800 000
B Normal probability distribution with a mean bid of E700 000 and a
standard deviation of E50 000

a. If the building contractor submits a bid of E750 000, what is the probability the building
contractor will obtain the bid? Use a worksheet to simulate 1000 trials of the contract
bidding process.
b. The building contractor is also considering bids of E775 000 and E785 000. If the
building contractor would like to bid such that the probability of winning the bid is about
0.80, what bid would you recommend? Repeat the simulation process with bids of
E775 000 and E785 000 to justify your recommendation.
11 In preparing for the upcoming holiday season, Baba Toy Company designated a new
doll called Nora. The fixed cost to produce the doll is E100 000. The variable cost,
which includes material, labour and shipping costs, is E34 per doll. During the holiday
selling season, Baba will sell the dolls for E42 each. If Baba overproduces the dolls,
the excess dolls will be sold in January through a distributor who has agreed to pay
Baba E10 per doll. Demand for new toys during the holiday selling season is extremely
uncertain. Forecasts are for expected sales of 60 000 dolls with a standard deviation of
15 000. The normal probability distribution is assumed to be a good description of the
demand.
a. Create a worksheet similar to the inventory worksheet in Figure 12.7. Include
columns showing demand, sales, revenue from sales, amount of surplus, revenue
from sales of surplus, total cost and net profit. Use your worksheet to simulate the
sales of the Nora doll using a production quantity of 60 000 units. Using 500
simulation trials, what is the estimate of the mean profit associated with the
production quantity of 60 000 dolls?
b. Before making a final decision on the production quantity, management wants an
analysis of a more aggressive 70 000 unit production quantity and a more conservative
50 000 unit production quantity. Run your simulation with these two production
quantities. What is the mean profit associated with each? What is your recommendation
on the production of the Nora doll?
c. Assuming that Baba’s management adopts your recommendation, what is the probability of
a stock-out and a shortage of the Nora dolls during the holiday season?
12 South Central Airlines operates a commuter flight between Munich and Innsbruck. The
plane holds 30 passengers, and the airline makes a E100 profit on each passenger on
the flight. When South Central takes 30 reservations for the flight, experience has
shown that on average, two passengers do not show up. As a result, with 30
reservations, South Central is averaging 28 passengers with a profit of

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