Chapter 7

Spreadsheet Models

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 Introduction
• Spreadsheet models are mathematical and logic-based models.
• Referred to as what-if models.
• They provide easy-to-use, sophisticated mathematical and logical
functions, allowing for easy instantaneous recalculation for a
change in model inputs.
• They are less expensive, often come preloaded on computers, and
are fairly easy to use, and the most used business analytics tool.

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 Building Good
Spreadsheet Models

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 Building Good Spreadsheet Models
• Considering the cost of producing a single product.

• Total cost of manufacturing a product is the sum of two costs: fixed

cost and variable cost.

• 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.

• Variable cost - Portion of the total cost that is dependent on and varies
with the production quantity.
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 Building Good Spreadsheet Models
• Influence diagram: Visual representation that shows which
entities influence others in a model.

• 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 7.1 - An Influence Diagram for Nowlin’s
Manufacturing Cost

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 Figure 7.2 - An Influence Diagram for comparing
Manufacturing versus Outsourcing cost for Nowlin plastics

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 Building Good Spreadsheet Models
• Building a Mathematical Model
• Let us first consider the cost of manufacturing the required units of
the Viper.
• As the influence diagram shows, this cost is a function of the fixed
cost, the variable cost per unit, and the quantity required.
• Define notation for every node in the influence diagram.
• q = quantity (number of units) required
• FC = the fixed cost of manufacturing
• VC = the per-unit variable cost of manufacturing
• TMC(q) = total cost to manufacture q units
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 Building Good Spreadsheet Models
• 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

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

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 Building Good Spreadsheet Models
• Mathematical model for the savings associated with outsourcing.
S(q) = TMC(q) – TPC(q)
S(q) = the savings due to outsourcing
• Nowlin has to decide, “For what quantities is it more cost-
effective to outsource rather than produce the Viper?”

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

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 Building Good Spreadsheet Models
• Spreadsheet Design and Implementing the Model in a
Spreadsheet
• For the Nowlin Plastics problem, we have defined the following
components
q, FC, VC, TMC(q), P, TPC(q), S(q)
• TMC, TPC, and S are the functions of other components, whereas q,
FC, VC, and P are not.

• 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

Spreadsheet Design and Implementing the Model in a Spreadsheet

• 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.

• 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.

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Figure 7.3 - Nowlin Plastics Make-versus-Buy
Spreadsheet Model

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 Building Good Spreadsheet Models
• The general principles of spreadsheet model design and
construction are:
• 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.
• 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.
• 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.
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What-If Analysis

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 What-If Analysis
• Data Table: Excel tool which quantifies the impact of changing the
value of a specific input on an output of interest.

• One-way data table: Summarizes a single input’s impact on the

output

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

output.

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Figure 7.4 The Input for Constructing a One-Way
Data Table for Nowlin Plastics

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Figure 7.5 Results of One-Way data table for Nowlin
Plastics

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Figure 7.6 - The input for constructing a Two-Way
data table for Nowlin Plastics

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Figure 7.7 - Results of Two-Way data table for
Nowlin Plastics

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 What-If Analysis
• 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).

• 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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What-If Analysis

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What-If Analysis

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

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 SUM and SUMPRODUCT
• SUM: Function that adds up all of the numbers in a range of cells.

• SUMPRODUCT: Function that returns the sum of the products of

elements in a set of arrays.

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Figure 7.10 - WHAT-IF model for Foster Generators

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 IF and COUNTIF
• IF: =IF(condition, result if condition is true, result if condition is
false)
• COUNTIF: Counts the number of components having a positive
order quantity.
• General form is =COUNTIF(range, condition)
• Illustration:
• Gambrell Manufacturing produces car stereos.
• Gambrell likes to keep its components inventory to a minimum.
• Hence, it uses an inventory policy known as an order-up-to policy.
• 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 7.11 - Gambrell Manufacturing Component
Ordering Model

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 Figure 7.11 - Gambrell Manufacturing Component
Ordering Model

• VLOOKUP: This function allows the user to pull a subset of data

from a larger table of data based on some criterion.
• 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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 VLOOKUP

• VLOOKUP: This function allows the user to pull a subset of data

from a larger table of data based on some criterion.
• 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 7.12 - Granite Insurance Bonus Model

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Auditing Spreadsheet
Models

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 Auditing Spreadsheet Models
• Excel contains a variety of tools to assist you in the development
and debugging of spreadsheet models.

• These tools are found in the Formula Auditing group of the

FORMULAS tab,

• Trace Precedents and Dependents

• 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.
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 Auditing Spreadsheet Models
• Trace Dependents button - Shows arrows pointing from the
selected cell to cells that depend on the selected cell.
• Both of the tools are excellent for quickly ascertaining how parts of a
model are linked.

Figure 7.13 The Formula Auditing Group

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Figure 7.14 - Trace Precedents for Foster Generator

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Figure 7.15 - Trace Dependents for the Foster
Generators Model

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 Auditing Spreadsheet Models

Show Formulas

• 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.

• To revert to hiding the formulas, click again on the Show

Formulas button.

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 Auditing Spreadsheet Models
Evaluate Formulas: This button allows you to investigate the
calculations of a cell in great detail.

Figure 7.16 - The Evaluate

Formula dialog box for
Gambrell Manufacturing

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 Figure 7.17 - The Evaluate Formula dialog box for Gambrell
Manufacturing cell B17 after four clicks of the Evaluate Button

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 Auditing Spreadsheet Models
• Error Checking: This button provides an automatic means of
checking for mathematical errors within formulas of a worksheet.

• Clicking on the Error Checking button causes Excel to check every

formula in the sheet for calculation errors.

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

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Figure 7.18 - The Error Checking dialog box for a
Division by Zero Error

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 Auditing Spreadsheet Models
• Watch Window: Located in the Formula Auditing group, allows
the user to observe the values of cells included in the Watch
Window box list.

• 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 7.19 - The Watch Window for cell B17 of the
Gambrell Manufacturing Model

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