Q: Joseph used the spreadsheet below to check the sensitivity of Innovative Speakers profit to increases in prices of components by suppliers next year. First he raised the cost of cabinets by 20% in cell B12, then noted the profit change in B6. Next he raised the cost of diaphragms in C12 by 20%, then noted the profit change. He repeated these steps for electronics and assembly. What mistake is Joseph making?
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Q: Joseph used the spreadsheet below to determine how Innovative Speakers’ earnings will be affected by supplier pricing increases for components in the upcoming year. He first increased the cost of cabinets in cell B12 by 20% before noting the difference in profit in cell B6. He then noticed the decrease in profit after raising the cost of the diaphragms in C12 by 20%. He went through similar procedures again for the electronics and assembly. What error is Joseph committing?
- Didn’t reset assumptions to original values
- No use of historical cost data
- Didn’t test changes in retail price
- All of these are true
- Didn’t test conditional logic in model
Explanation: This is the key issue. By not resetting the costs of the components after testing each one, the subsequent tests are based on altered values from previous tests, which can lead to compounded errors in profit calculations and a misunderstanding of the sensitivity of profit to each component’s cost change.
