BAM Individual Assessment 2
BOB THE BUILDER
Bob the Builder is a very clever backyard engineer who has just invented a new bicycle brake pad
that will greatly improve the ability of pushbikes to stop safely in wet conditions.
Bob really wants to produce his new brake pads (which are to be sold in sets of two pads),
however he is concerned about the market conditions (i.e. sale price) that will prevail and also
about his costs of production. Bob actually has no fixed costs of production, but he will certainly
have variable costs. The magnitude of those costs is unknown at this time, however Bob thinks
they may be around $58.75 per set of brake pads.
Bob’s friend Fred is going to help finance the brake pad business. As an economist Fred has
therefore conducted some research to determine that the demand equation for the new bicycle
brake pads is given by P=140-0.02Q where P is the price of a brake pad set in dollars and Q is the
total quantity of brake pad sets demanded by the market per month. It is also known that the
quantity of brake pad sets demanded by the market is the summation of demand from two main
groups of buyers – namely road bike riders and mountain bike riders. Hence when the total level
of demand is known, the associated market price can be determined from the demand equation.
Fred also believes strongly that the demand from road bike riders can be accurately estimated by a
normal distribution with a mean of 1350 brake pad sets per month and a standard deviation of 250
sets per month. However, for mountain bike riders Fred considers that there is just a 21% chance
that they will have a high demand for the new brake pads. If such high demand eventuates then
the mountain bike riders are expected to buy 1600 brake pad sets per month. However, if the
demand from this group is only medium (which has a probability of 47%) then their demand will fall
to 1100 brake pad sets per month. That leaves a 32% chance that mountain bike riders won’t
particularly take up the new brake pads, and in that case their demand would be quite low at only
800 brake pad sets per month.
Noting the above, both Bob and Fred now want to be able to determine whether their proposed
brake pad business will be profitable.
YOU ARE REQUIRED TO:
| (a) | Design and build a comprehensive, robust, accurate and necessarily flexible model (i.e. an MS Excel spreadsheet) to fully analyse the stated business problem. As a minimum you will need |
to determine the level of variable cost that Bob and Fred can endure to maintain the brake pad
business as profitable.
| (b) | Write a supporting report (1000 words). This is to be a detailed document that will enable the instructor to clearly understand: |
(i) how your model works (i.e. its inputs, assumptions, methods, calculations, etc) and why
you designed it that way;
(ii) the core outputs and results from both your model and, importantly, any useful
sensitivity/scenario analysis; and
(iii) the conclusions drawn from the analysis, and the recommendations made to solve the
stated business problem.
(c) Submit both your Excel spreadsheet and your report by the due date and time.
BAM Individual Assessment 2
Please note that this is an individual assignment. It should be undertaken by each student on an
individual basis and without collaboration.