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Chapter 6 (spreadsheet model) (1)

11/29/2017

CHAPTER 6

SPREADSHEET MODELS

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Introduction
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Spreadsheet models are mathematical and logic-based
models

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Referred to as what-if models
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Provide easy-to-use,
logical functions


sophisticated

mathematical

and

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Allow for easy instantaneous recalculation for a change in
model inputs

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Are less expensive

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Often come preloaded on computers

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Are fairly easy to use

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The most used business analytics tool

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Building Good
Spreadsheet Models
INFLUENCE DIAGRAMS
BUILDING A MATHEMATICAL MODEL
SPREADSHEET DESIGN AND IMPLEMENTING THE MODEL IN A SPREADSHEET

Building Good Spreadsheet
Models
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Total cost of manufacturing a product is the sum of two
costs:
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Fixed cost: Portion of the total cost that does not depend on the
production quantity and remains the same no matter how much
is produced

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Variable cost: Portion of the total cost that is dependent on and
varies with the production quantity

Make-versus-buy decision: comparing the costs of
manufacturing in-house to the costs of outsourcing
production to another firm

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Building Good Spreadsheet
Models

5



Example:



Nowlin Plastics produces a line of cell phone covers.
Nowlin’s best-selling cover is its Viper model, a slim but
very durable black and gray plastic cover. The annual
fixed cost for the Viper cover is $234,000.



This fixed cost includes management time, advertising,
and other costs that are incurred regardless of the
number of units eventually produced.



In addition, the total variable cost, including labor and
material costs, is $2 for each unit produced.

Building Good Spreadsheet
Models

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Influence Diagrams
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An influence diagram is a visual representation
that shows which entities influence others in a
model

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Parts of the model are represented by circular or
oval symbols called nodes, and arrows
connecting the nodes show influence

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Figure 6.1: An Influence Diagram
for Nowlin’s Manufacturing Cost

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Figure 6.2: An Influence Diagram for
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Comparing
Manufacturing
Versus
Outsourcing Cost for Nowlin Plastics

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Building Good Spreadsheet
Models

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Building a Mathematical Model
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Consider the cost of manufacturing the required units of
the Viper

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As the influence diagram shows, this cost is a function of
the fixed cost, the variable cost per unit, and the
quantity required

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Define notation for every node in the influence diagram:
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q = quantity (number of units) required

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FC = the fixed cost of manufacturing

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VC = the per-unit variable cost of manufacturing

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TMC(q) = total cost to manufacture q units

Building Good Spreadsheet
Models
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u

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The cost-volume model for producing q units is
TMC(q) = FC + (VC × q)
For the Viper, FC = $234,000 and VC = $2, so
TMC(q) = $234,000 + $2q
Mathematical model for purchasing q units is
TPC(q) = Pq
P = the per unit purchase cost
TPC(q) = the total cost to outsource or purchase q units

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For the Viper, since P = $3.50, TPC(q) = 3.5q

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Building Good Spreadsheet
Models

11

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Mathematical model for the savings associated
with outsourcing
S(q) = TMC(q) – TPC(q)
S(q) = the savings due to outsourcing

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Nowlin has to decide, “For what quantities is it
more cost-effective to outsource rather than
produce the Viper?”

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Mathematically, this question is, “For what values
of q is S(q) > 0?”

Building Good Spreadsheet
Models

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Spreadsheet Design and Implementing the Model in a
Spreadsheet

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For the Nowlin Plastics problem, we have defined the
following components:
q, FC, VC, TMC(q), P, TPC(q), S(q)

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TMC, TPC, and S are the functions of other components,
whereas q, FC, VC, and P are not

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TMC, TPC, and S will be formulas involving other cells in
the spreadsheet model, whereas q, FC, VC, and P will just
be entries in the spreadsheet

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Building Good Spreadsheet
Models

13

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The number of Vipers to make or buy for next year is
really a decision Nowlin gets to make, hence we refer
to quantity q as a decision variable

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FC, VC, and P are measurable factors that define
characteristics of the process we are modelling, hence
we refer to FC, VC, and P as parameters

Figure 6.3: Nowlin Plastics Make14
Versus-Buy Spreadsheet Model

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Building Good Spreadsheet
Models
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The general principles of spreadsheet model design and
construction are:
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Separate the parameters from the model: This enables
the user to update the model parameters without the
risk of mistakenly creating an error in a formula

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Document the model and use proper formatting and
color as needed: A good spreadsheet model is well
documented. Clear labels and proper formatting and
alignment facilitate navigation and understanding

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Use simple formulas: Clear, simple formulas can
reduce errors and make maintaining the spreadsheet
easier. Long and complex calculations should be
divided into several cells

What-If Analysis
DATA TABLES
GOAL SEEK

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What-If Analysis

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Data Tables
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Data Table: Excel tool which quantifies the
impact of changing the value of a specific
input on an output of interest

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One-way data table: summarizes a single
input’s impact on the output

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Two-way data table: summarizes two inputs’
impact on the output

Figure 6.4: The Input for Constructing
18 a
One-Way Data Table for Nowlin Plastics

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Figure 6.5 Results of One-Way
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Data Table for Nowlin Plastics

Figure 6.6: The Input for Constructing 20
a
Two-Way Data Table for Nowlin Plastics

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Figure 6.7: Results of Two-Way Data
Table for Nowlin Plastics

What-If Analysis

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Goal Seek
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Goal Seek: Excel tool that allows the user to
determine the value of an input cell that will
cause the value of a related output cell to
equal some specified value (the goal)

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In the case of Nowlin Plastics, suppose we
want to know the value of the quantity of
Vipers where it becomes more cost effective
to manufacture rather than outsource

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Figure 6.8: Goal Seek Dialog Box
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for Nowlin Plastics

Figure 6.9: Results from Goal Seek for 24
Nowlin Plastics

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Some Useful Excel
Functions for Modeling
SUM AND SUMPRODUCT
IF AND COUNTIF
VLOOKUP

Some Useful Excel Functions for Modeling26
SUM and SUMPRODUCT
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SUM: Function that adds up all of the numbers in a range of cells

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SUMPRODUCT: Function that returns the sum of the products of
elements in a set of arrays

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Figure 6.10: What-If Model for
Foster Generators

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Some Useful Excel Functions for Modeling
IF and COUNTIF
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=IF(condition, result if condition is true, result if condition is false)

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=COUNTIF(range, condition)
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Counts the number of components having a positive order
quantity

Illustration:
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Gambrell Manufacturing produces car stereos

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Gambrell likes to keep its components inventory to a minimum

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Hence, it uses an inventory policy known as an order-up-to
policy

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Order-up-to policy: Whenever the inventory on hand drops
below a certain level, enough units are ordered to return the
inventory to that predetermined level

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Figure 6.11: Gambrell Manufacturing
Component Ordering Model

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Some Useful Excel Functions for Modeling
VLOOKUP
u This function allows the user to pull a subset of data
from a larger table of data based on some criterion
u General form =VLOOKUP(value, table, index, range)
where,
value = the value to search for in the first column
of the table
table = the cell range containing the table
index = the column in the table containing the
value to be returned
range = TRUE if looking for the first approximate
match of value and FALSE if looking for an
exact match of value

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Figure 6.12: Granite Insurance Bonus Model

Auditing Spreadsheet
Models
TRACE PRECEDENTS AND DEPENDENTS
SHOW FORMULAS
EVALUATE FORMULAS
ERROR CHECKING
WATCH WINDOW

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Auditing Spreadsheet Models

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Excel contains a variety of tools to assist you in the
development and debugging of spreadsheet models

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These tools are found in the Formula Auditing group of the
Formulas tab

Auditing Spreadsheet Models

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Trace Precedents and Dependents
u Trace Precedents button: After selecting cells, this button
creates arrows pointing to the selected cell from cells that
are part of the formula in that cell
u Trace Dependents button: Shows arrows pointing from the
selected cell to cells that depend on the selected cell
u Both of the tools are excellent for quickly ascertaining how
parts of a model are linked

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Figure 6.13: The Formula Auditing Group

Figure 6.14: Trace Precedents for Foster 36
Generator

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Figure 6.15: Trace Dependents for37
the Foster Generators Model

Auditing Spreadsheet Models

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Show Formulas
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To see the formulas in a worksheet, simply click on any cell
in the worksheet and then click on Show Formulas—you will
see the formulas residing in that worksheet

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To revert to hiding the formulas, click again on the Show
Formulas button

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Auditing Spreadsheet Models

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Evaluate Formulas
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The Evaluate Formulas button allows you to
investigate the calculations of a cell in great
detail

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Provides an excellent means of identifying the
exact location of an error in a formula

Figure 6.16: The Evaluate Formula Dialog
Box for Gambrell Manufacturing

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Figure 6.17: The Evaluate Formula Dialog
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Box for Gambrell Manufacturing Cell B17
after Four Clicks of the Evaluate Button

Auditing Spreadsheet Models

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Error Checking
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The Error Checking button provides an automatic
means of checking for mathematical errors within
formulas of a worksheet

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Clicking on the Error Checking button causes
Excel to check every formula in the sheet for
calculation errors

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If an error is found, the Error Checking dialog box
appears

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Figure 6.18: The Error Checking Dialog 43
Box for a Division by Zero Error

Auditing Spreadsheet Models

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Watch Window
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The Watch Window, located in the Formula
Auditing group, allows the user to observe the
values of cells included in the Watch Window box
list

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Useful for large models when not all of the model
is observable on the screen or when multiple
worksheets are used

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Figure 6.19: The Watch Window for Cell
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B17 of the Gambrell Manufacturing
Model

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