Tutorial 10: Performing What-If Analyses

Objectives Explore the principles of cost-volume-profit relationships Perform a basic what-if analysis Use Goal Seek to calculate a solution Create a one-variable data table Create a two-variable data table Create and apply different Excel scenarios New Perspectives on Microsoft Excel 2010

Objectives Generate a scenario summary report Generate a scenario PivotTable report Explore the principles of price elasticity Run Solver to calculate optimal solutions Create and apply constraints to a Solver model Save and load a Solver model New Perspectives on Microsoft Excel 2010

Visual Overview New Perspectives on Microsoft Excel 2010

Data Tables and What-If Analysis New Perspectives on Microsoft Excel 2010

Understanding Cost-Volume-Profit Relationships Cost-volume-profit (CVP) analysis Studies the relationship between expenses, sales volume, and profitability Helps predict the effect of cutting overhead or raising prices on a company’s net income Sometimes called break-even analysis New Perspectives on Microsoft Excel 2010

Comparing Expenses and Revenue Types of expenses Variable expenses change in proportion to the amount of business a company does Fixed expense must be paid regardless of sales volume Mixed expense is part variable and part fixed New Perspectives on Microsoft Excel 2010

Determining the Break-Even Point Break-even point: revenue equals expenses A CVP chart shows the relationship between expenses and revenue New Perspectives on Microsoft Excel 2010

Performing a What-If Analysis with Goal Seek What-if analysis lets you explore the impact of changing different values in a worksheet Goal Seek automates trial-and-error process Allows you to specify a value for a calculated item Excel returns input value needed to reach the goal Goal Seek dialog box New Perspectives on Microsoft Excel 2010

Performing a What-If Analysis with Goal Seek New Perspectives on Microsoft Excel 2010

Working with Data Tables Display results from several what-if analyses One-variable data table Specify one input cell and any number of result cells Useful in business to explore how changing a single input cell can impact several result cells New Perspectives on Microsoft Excel 2010

Charting a One-Variable Data Table Gives a better picture of relationship between sales volume, revenue, and total expenses New Perspectives on Microsoft Excel 2010

Creating a Two-Variable Data Table Analyzes a variety of combinations simultaneously Uses two input cells, but displays only a single result value Must identify the row input cell and the column input cell New Perspectives on Microsoft Excel 2010

Creating a Two-Variable Data Table New Perspectives on Microsoft Excel 2010

Charting a Two-Variable Data Table New Perspectives on Microsoft Excel 2010

Visual Overview New Perspectives on Microsoft Excel 2010

What-If Scenarios New Perspectives on Microsoft Excel 2010

Using the Scenario Manager Create scenarios to perform a what-if analysis with more than two input cells Define names for all input and result cells that you intend to use in the analysis Defined names automatically appear in reports generated by the Scenario Manager Using defined names makes it easier to work with scenarios and understand the scenario reports New Perspectives on Microsoft Excel 2010

Using the Scenario Manager Use the Scenario Manager to define scenarios Each scenario includes a scenario name, input cells, and values for each input cell Number of scenarios is limited only by computer’s memory Input cells are referred to as changing cells Contain values that are changed under the scenario Can be located anywhere in the worksheet New Perspectives on Microsoft Excel 2010

Using the Scenario Manager Edit Scenario dialog box New Perspectives on Microsoft Excel 2010

Using the Scenario Manager Scenario Values dialog box New Perspectives on Microsoft Excel 2010

Using the Scenario Manager View the effect of each scenario by selecting it in the Scenario Manager dialog box New Perspectives on Microsoft Excel 2010

Using the Scenario Manager Editing a Scenario Edit the assumptions to view other possibilities Worksheet calculations are automatically updated to reflect the new scenario New Perspectives on Microsoft Excel 2010

Creating a Scenario Summary Report Displays the values of the input cells and result cells under each scenario Tabular layout makes it simpler to compare results of each scenario Automatic formatting makes it useful for reports and meetings New Perspectives on Microsoft Excel 2010

Scenario Summary Report New Perspectives on Microsoft Excel 2010

Creating a Scenario PivotTable Report Displays results from each scenario as a pivot field in a PivotTable New Perspectives on Microsoft Excel 2010

Creating a Scenario PivotTable Report Results for the table can be displayed in a PivotChart New Perspectives on Microsoft Excel 2010

Visual Overview New Perspectives on Microsoft Excel 2010

Using Solver New Perspectives on Microsoft Excel 2010

Understanding Price Elasticity of Demand Point of maximum revenue occurs somewhere between lowest and highest sales price Demand and revenue as functions of price New Perspectives on Microsoft Excel 2010

Understanding Price Elasticity of Demand Effect of one financial variable upon another Price elasticity of demand Effect that price has on demand Elasticity measures are always expressed as positive values New Perspectives on Microsoft Excel 2010

Price Elasticity of Demand Relatively inelastic Price elasticity of demand is less than 1 Large changes in price cause small changes in demand Perfectly inelastic Elasticity equals 0 Changes in price have no impact on demand Relatively elastic Price elasticity of demand is greater than 1 Demand is very responsive to changes in price Perfectly elastic Large elasticity values Any change in price causes a huge change in demand Unit elastic Elasticity equals 1.0 Any change in price is met by an equal and opposite change in demand New Perspectives on Microsoft Excel 2010

Maximizing Net Income Through Trial and Error Using the trial and error process can be very time-consuming if you have a large range of possible values New Perspectives on Microsoft Excel 2010

Finding an Optimal Solution Using Solver Solver searches for the optimal solution to a problem involving several variables Arrives at optimal solutions through an iterative procedure Because it is an add-in, Solver might need to be activated New Perspectives on Microsoft Excel 2010

Setting Up Solver to Find a Solution Specify three Solver parameters Objective cell Variable (or changing) cells Constraints New Perspectives on Microsoft Excel 2010

Setting Up Solver Constraints Constraints confine the solution within a reasonable set of defined limits Constraints supported by Solver <=, >=, and = integer or int binary or bin dif or AllDifferent New Perspectives on Microsoft Excel 2010

Setting Up Solver Constraints Add Constraint dialog box New Perspectives on Microsoft Excel 2010

Setting Up Solver Constraints Completed Solver Parameters dialog box New Perspectives on Microsoft Excel 2010

Creating a Solver Answer Report Solver can create three different reports Answer report (the most useful) Sensitivity report Limits report New Perspectives on Microsoft Excel 2010

Sections of a Solver Answer Report Titles Information about the objective cell: location, cell label, and cell’s original value and final values Information about the changing cells (variable cells): location, column and row label, original value, and final value of each cell Information about the constraints: not binding and binding, and slack New Perspectives on Microsoft Excel 2010

Creating a Solver Answer Report New Perspectives on Microsoft Excel 2010

Choosing a What-If Analysis Tool Data tables To perform several what-if analyses involving one or two input cells and to display analysis in a tabular format Easily displayed as charts Create a scenario For what-if analyses involving more than two input cells Scenario summary tables and scenario PivotTables can be used to obtain a quick snapshot of several possible outcomes Scenarios can be merged and shared among several workbooks Solver To maximize or minimize a value (provide a single solution or “best outcome”) To set a calculated cell to a specific value Goal Seek If you don’t need to specify any constraints on your solution New Perspectives on Microsoft Excel 2010

Saving and Loading Solver Models Save parameters in cells in the worksheet Reload the parameters from the worksheet cells without having to reformulate the problem Create dozens of models that you can load and apply to your analysis as new data is entered Load/Save Model dialog box New Perspectives on Microsoft Excel 2010

Saving and Loading Solver Models Saved Solver model New Perspectives on Microsoft Excel 2010