The document discusses using probabilistic modeling to evaluate profitability and production capacity scenarios for a manufacturing company with a portfolio of products made across multiple production lines. It summarizes: 1) The model evaluates two scenarios - maintaining sales of slower products C and D, and replacing product A with B, or maximizing sales of C and D and evaluating A vs B. 2) Scenario 1 finds replacing A with B results in lower total capacity but higher overall profits with less risk of losses. 3) Scenario 2 finds higher sales of C and D further lowers capacity when replacing A with B, but profitability of A increases in this scenario.

1. Jose A. Briones, Ph.D. SpyroTek Performance Solutions, LLC Palisade’s Risk Analysis Conference, October 2009

9. Line 1 Line 2 Line 3 Line 4 Product Family A Product Family B Product Family C Product Family D Post-Treatment Facility 350 Kg/hr 125 Kg/hr/line 87.5 Kg/hr/line 62.5 Kg/hr/line 37.5 Kg/hr/line

12. Typical Range Range Min Max Production Target of product C, Kg/mo 15,000 10,000 20,000 Production Target of product D, Kg/mo 10,000 5,000 15,000 Production Rate of Product A, lines 1 and 2, Kg/hr 250 240 260 Production Rate of Product B, lines 1 and 2, Kg/hr 175 165 200 Rate of Production product C, lines 3 and 4 Kg/hr 125 90 140 Rate of Production product D, lines 3 and 4 Kg/hr 75 60 80 Maximum Production Rate 4 lines running, Kg/hr 350 330 370 Var Margin Product A US$/kg $2.50 $2.30 $2.70 Var Margin Product B US$/kg $2.75 $2.60 $3.00 Var Margin Product C US$/kg $4.00 $3.50 $4.50 Var Margin Product D US$/kg $5.00 $4.50 $5.50 Plant fixed cost Euros/month 500,000 € 450,000 € 550,000 € Selling & Admin costs Euros/month 50,000 € 45,000 € 55,000 € Projected fixed cost savings Euros/month 75,000 € 65,000 € 90,000 € US Dollar/ Euro Exchange Rate 0.8 0.7 0.95

16. 0 . 0 0 . 1 0 . 2 0 . 3 0 . 4 0 . 5 0 . 6 0 . 7 0 . 8 0 . 9 0 10 20 30 40 50 60 % of treatment line time devoted to A or B, C & D % of treatment line time devoted to A + B Grades / Column Minimum 0.7431 Maximum 0.8577 Mean 0.8027 Std Dev 0.0176 Values 1000 % of treatment line time devoted to Product D / Column Minimum 0.0854 Maximum 0.1304 Mean 0.1031 Std Dev 0.00761 Values 1000 % of treatment line time devoted to Product C / Column Minimum 0.0549 Maximum 0.1432 Mean 0.0941 Std Dev 0.0155 Values 1000 20% of Production time is allocated to C & D C D A or B 5.0% 100.0% 0.772 0.829

17. 2 . 3 2 . 4 2 . 5 2 . 6 2 . 7 2 . 8 2 . 9 3 . 0 3 . 1 Values in Millions 0 1 2 3 4 5 6 7 V a l u e s x 1 0 ^ - 6 Total theoretical capacity, Product A plus Products C & D, kg/yr Total theoretical capacity, Product A plus Products C & D, kg/yr Minimum 2633085.3298 Maximum 3018607.7688 Mean 2803346.2034 Std Dev 63912.9226 Values 1000 Total theoretical capacity, Product B plus products C & D, kg/yr Minimum 2357095.8177 Maximum 2788160.2845 Mean 2604929.4916 Std Dev 65567.7702 Values 1000 Substituting Product A with Product B Results in Lower Total Plant Capacity A B 5.0% 90.0% 5.0% 92.3% 7.7% 0.0% 2.699 2.906

18. - 1 . 5 - 1 . 0 - 0 . 5 0 . 0 0 . 5 1 . 0 1 . 5 2 . 0 2 . 5 Values in Millions 0 1 2 3 4 5 6 7 8 V a l u e s x 1 0 ^ - 7 Profitability, Product A vs. Product B US$/yr Profitability, Product A Case US$/yr / Column Minimum -1219775.4188 Maximum 2289688.1319 Mean 596061.7364 Std Dev 598929.0090 Values 1000 Profitability, Product B Case US$/yr / Column Minimum -1091259.4015 Maximum 2484366.8328 Mean 752663.4930 Std Dev 597144.6785 Values 1000 Product B has a lower probability of losses than product A A B A 17.3% 75.9% 6.8% 11.3% 75.8% 12.9% 0.000 1.450

19. $0.1899 Values 1000 Fixed cost US$/kg Product B Minimum $2.0664 Maximum $3.1881 Mean $2.5700 Std Dev $0.1997 Values 1000 A B C D Slower production rates result in much higher fixed costs for Products C and D 5.0% 90.0% 5.0% 99.8% 0.2% 0.0% 5.45 7.40 1 2 3 4 5 6 7 8 9 Values in $ 0.0 0.5 1.0 1.5 2.0 2.5 Fixed cost US$/kg Products A, B, C, D Fixed cost US$/kg Product D Minimum $4.9476 Maximum $8.3905 Mean $6.3397 Std Dev $0.6112 Values 1000 Fixed cost US$/kg Product C Minimum $2.8058 Maximum $5.5362 Mean $3.8559 Std Dev $0.4473 Values 1000 Fixed cost US$/kg Product A Minimum $1.8656 Maximum $2.9132 Mean $2.3665 Std Dev

20. Minimum -$1.5576 Maximum $1.4447 Mean $0.1441 Std Dev $0.4867 Values 1000 Profit Product D US$/Kg / Minimum -$4.5032 Maximum -$0.7534 Mean -$2.3397 Std Dev $0.6452 A B D C Product D has a Negative Gross Profit Due to Long Production Cycles 5.0% 5.0% 2.9% 12.1% -0.22 0.48 - 5 - 4 - 3 - 2 - 1 0 1 2 Values in $ 0.0 0.5 1.0 1.5 2.0 2.5 Gross Profit Products A, B, C, D US$/Kg Profit Product A US$/Kg / Column Minimum -$0.5836 Maximum $0.7011 Mean $0.1335 Std Dev $0.2097 Values 1000 Profit Product B US$/Kg / Column Minimum -$0.4348 Maximum $0.8052 Mean $0.2133 Std Dev $0.2216 Values 1000 Profit Product C US$/Kg /

21. ~50% of time devoted to C & D A or B C D 5.0% 90.0% 5.0% 100.0% 0.0% 0.0% 0.448 0.575 0 . 0 0 . 1 0 . 2 0 . 3 0 . 4 0 . 5 0 . 6 0 . 7 0 10 20 30 40 50 60 % of treatment line time devoted to A/B, C & D Grades % of treatment line time devoted to A + B Grades / Column Minimum 0.3699 Maximum 0.6080 Mean 0.5203 Std Dev 0.0384 Values 5000 % of treatment line time devoted to Product D / Column Minimum 0.0849 Maximum 0.1304 Mean 0.1032 Std Dev 0.00770 Values 5000 % of treatment line time devoted to Product C / Column Minimum 0.2963 Maximum 0.5094 Mean 0.3766 Std Dev 0.0374 Values 5000

22. Production of B v.s A results in a more significant loss of capacity compared to Scenario 1 A B 5.0% 90.0% 5.0% 100.0% 0.0% 0.0% 2.700 2.906 1 . 8 2 . 0 2 . 2 2 . 4 2 . 6 2 . 8 3 . 0 3 . 2 Values in Millions 0 1 2 3 4 5 6 7 V a l u e s x 1 0 ^ - 6 Total theoretical capacity, Product A vs. B plus Products C & D, kg/yr Total theoretical capacity, Product A plus Products C & D, kg/yr Minimum 2596788.1735 Maximum 3001093.4875 Mean 2803246.3861 Std Dev 62557.3764 Values 5000 Total theoretical capacity, Product B plus products C & D, kg/yr Minimum 1942146.1959 Maximum 2697819.5994 Mean 2362657.7945 Std Dev 120704.1615 Values 5000

23. Production of A has less than 2% probability of losses, 48% probability of profit >1.5 MM $ A B 1.2% 51.1% 47.7% 13.2% 72.0% 14.8% 0.00 1.45 - 3 - 2 - 1 0 1 2 3 4 Values in Millions 0 1 2 3 4 5 6 7 V a l u e s x 1 0 ^ - 7 Profitability, Product A vs B Case US$/yr Profitability, Product A Case US$/yr / Column Minimum -852160.3638 Maximum 3287264.9694 Mean 1405082.2802 Std Dev 608985.6034 Values 5000 Profitability, Product B Case US$/yr / Column Minimum -2021651.9911 Maximum 3250368.3280 Mean 735213.2672 Std Dev 665321.2558 Values 5000

24. Values in $ 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Fixed cost US$/kg Products A, B, C & D Fixed cost US$/kg Product D / Column Minimum $4.6730 Maximum $8.7315 Mean $6.3410 Std Dev $0.6228 Values 5000 Fixed cost US$/kg Product C / Column Minimum $2.6522 Maximum $5.8660 Mean $3.8579 Std Dev $0.4645 Values 5000 Fixed cost US$/kg Product A / Column Minimum $1.2306 Maximum $2.6219 Mean $1.9559 Std Dev $0.2068 Values 5000 Fixed cost US$/kg Product B. / Column Minimum $1.8782 Maximum $3.2967 Mean $2.5241 Std Dev $0.2136 Values 5000 Fixed Cost of Product A drops in this scenario A B D C 5.0% 90.0% 5.0% 99.8% 0.2% 0.0% 5.40 7.43 1 2 3 4 5 6 7 8 9

25. Values in $ 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Profit Products A, B C & D US$/Kg Profit Product A US$/Kg / Column Minimum -$0.1944 Maximum $1.2512 Mean $0.5441 Std Dev $0.2233 Values 5000 Profit Product B US$/Kg / Column Minimum -$0.6366 Maximum $1.0344 Mean $0.2593 Std Dev $0.2276 Values 5000 Profit Product C US$/Kg / Column Minimum -$2.0249 Maximum $1.5637 Mean $0.1421 Std Dev $0.5091 Values 5000 Profit Product D US$/Kg / Column Minimum -$4.8411 Maximum -$0.3715 Mean -$2.3410 Std Dev $0.6569 Values 5000 Profit of Product A increases in this scenario A B D C 0.7% 94.3% 5.0% 13.2% 86.7% 0.1% 0.00 0.91 - 5 - 4 - 3 - 2 - 1 0 1 2

26. Scenario 2 with sales of Product A has the best probability for higher profits Scenario 1 - A Scenario 1 - B Scenario 2 - A Scenario 2 - B % time devoted to C & D 20% 20% 48% 48% Production of C 0.2 MM kg/yr 0.2 MM kg/yr 0.7 MM kg/yr 0.7 MM kg/yr Total Plant Capacity 2.8 MM kg/yr 2.6 MM kg/yr 2.8 MM kg/yr 2.4 MM kg/yr Profitability 0.6 MM$/yr 0.75 MM$/yr 1.4 MM $/yr 0.7 MM $/yr Probability of Losses 17% 11% 1% 13%

27. Fixed cost for Product A drops in Scenario 2, gross profit increases Product D has negative gross profit under both scenarios Scenario 1 – Fixed Cost/Kg Scenario 1 – Gross Profit/Kg Scenario 2 – Fixed Cost/Kg Scenario 2 – Gross Profit/Kg Product A $2.37 $0.13 $1.96 $0.54 Product B $2.57 $0.21 $2.52 $0.26 Product C $3.86 $0.14 $3.85 $0.14 Product D $6.34 -$2.34 $6.34 -$2.34

28. 0.73 -0.51 0.34 0.22 0.13 0.10 0.07 0.06 0.06 -0.05 0.05 0.04 0.03 0.02 0.01 - 0 . 6 - 0 . 4 - 0 . 2 0 . 0 0 . 2 0 . 4 0 . 6 0 . 8 Coefficient Value Production of product D, Kg/mo Hours/day operating Production Rate of Product A, lines 1 and 2, kg/hr Var Margin Product D US$/kg Rate of Production product D, Kg/mo Selling & Admin costs Euros/month Var Margin Product C US$/kg Production of product C, Kg/mo Days of the week operating Operational Efficiency Projected fixed cost savings Euros/month Maximum Production Rate 4 lines running, kg/hr Var Margin Product A US$/kg Plant fixed cost Euros/month US Dollar/ Euro Exchange Rate Profitability, Product A Case US$/yr / Column Regression Coefficients Maximum Production Rate for the 4 lines is a critical factor for profitability of A

32. 5.0% 90.0% 5.0% 100.0% 0.0% 0.0% 154.4 172.8 8 0 9 0 1 0 0 1 1 0 1 2 0 1 3 0 1 4 0 1 5 0 1 6 0 1 7 0 1 8 0 1 9 0 Values in Thousands 0 1 2 3 4 5 6 7 8 V a l u e s x 1 0 ^ - 5 Theoretical capacity Products A & B Kg/mo Theoretical capacity Product A Kg/mo / Column Minimum 143825.4377 Maximum 182165.7345 Mean 163603.8872 Std Dev 5589.9594 Values 5000 Theoretical capacity Product B kg/mo / Column Minimum 89846.9886 Maximum 157539.8296 Mean 126888.1712 Std Dev 10465.5035 Values 5000