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Slides 2b: How to create an Influence Diagram:start with a performance measure variable.
Further decompose each of the intermediate variables into more related intermediate variables.
Decompose this variable into two or more intermediate variables that combine mathematically to define the value of the performance measure.
Continue this process until an exogenous variable is defined (i.e., until you define an input decision variable or a parameter).
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TVC
TFC
Unit VC
Revenue
Demand
Price
Total Cost
Profit
Advertising
An Example Influence Diagram
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performance measure variable
ProfitStart here:
Decompose this variable into the intermediate variables Revenue and Total Cost
Example: Simon Pie
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Profit
Revenue Total Cost
Now, further decompose each of these intermediate variables into more related
intermediate variables ...
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Model ConstructionBased on the previous Influence Diagram, create the equations relating the variables to be specified in the spreadsheet.
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Profit
Revenue Total Cost
Profit = Revenue – Total Cost
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Profit
Revenue
Pie Price
Pies Demanded
Revenue = Pie Price * Pies Demanded
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Fixed Cost
ProcessingCost
IngredientCost
Profit
Total Cost
Total Cost = Processing Cost + Ingredients Cost + Fixed Cost
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Processing Cost = Pies Demanded * Unit Pie Processing Cost
ProcessingCost
Total Cost
Pies Demanded
Unit PieProcessing Cost
Profit
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Ingredients Cost = Qty Filling * Unit Cost Filling + Qty Dough * Unit Cost Dough
IngredientCost
Profit
Total Cost
Unit CostFilling
Unit CostDough
RequiredIngredientQuantities
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Profit
Revenue Total Cost
Pies Demanded
Pie PriceUnit Pie
Processing Cost Fixed Cost
ProcessingCost
IngredientCost
Unit CostFilling
Unit CostDough
RequiredIngredientQuantities
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Simon’s Initial Model Input ValuesPie Price
Pies Demanded and sold
Unit Pie Processing Cost ($ per pie)
Unit Cost, Fruit Filling ($ per pie)
Unit Cost, Dough ($ per pie)
Fixed Cost ($000’s per week)
$8.00
16
$2.05
$3.48
$0.30
$12
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To represent this model in an Excel Spreadsheet,you should adhere to the following recommendations:Present input variables together and label them.
Clearly label the model results.Give the units of measure where appropriate.
Store parameters in separate cells as data and refer to them in formulas by cell references. Use bold fonts, cell indentations, cell underlines and other Excel formatting options to facilitate interpretation.
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Initial Simon Pie Weekly Profit Model
(Click on spreadsheet to open Excel)
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“What if?” ProjectionAllows you to determine what would happen if you used alternative 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 values of these parameters in the spreadsheet to view the resulting Profit.
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What if we change the values of two parameters?
What effect will that haveon Total Cost and Profit?
