ITPEC FE Subject A April 2026 Question 58
A factory manager is planning the costs for the next two years. Instead of using a single estimate, the manager runs thousands of simulations where material prices, customer demand, and labor costs vary randomly within realistic ranges. This creates a probability distribution of possible costs, helping in risk planning and setting contingency budgets. Which of the following is an analytical method that the manager is using?
Explanation
Monte Carlo analysis — thousands of runs with inputs drawn at random from realistic ranges, giving a probability distribution of outcomes.
The two markers are repeated random sampling of several uncertain inputs at once, and a distribution as the result rather than a single figure. The distribution shows how likely each cost level is, which is what risk planning and contingency budgets need.
Answer (b)
Why not others:
- •(c) Scenario analysis — evaluates a few chosen cases, such as best, expected and worst; it gives a handful of outcomes, not a distribution
- •(d) Sensitivity analysis — changes one input at a time with the others held fixed, to see which drives the result most
- •(a) Linear programming — finds the optimum of a linear objective under linear constraints; it optimises rather than modelling uncertainty
Key rule: Many random trials producing a distribution is Monte Carlo; a few fixed cases is scenario analysis; one variable varied at a time is sensitivity analysis.
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