Quantitative techniques chap01

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Stevenson and OzgurFirst Edition

Introduction to

Management Sciencewith Spreadsheets

Part 1 Introduction to Management Science and Forecasting

McGraw-Hill/Irwin Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1

Introduction to ManagementScience, Modeling, and

Excel Spreadsheets


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Learning Objectives

1. Describe the importance of management science.

2. Describe the advantages of a quantitative approach

to problem solving.

3. List some of the applications and use of

management science models.

4. Discuss the types of models most useful in

management science.5. Demonstrate the basic building blocks and

components of Excel.

After completing this chapter, you should be able to:


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Learning Objectives (contd)

6. Describe the basic nature and usefulness of break-

even analysis.

7. List and briefly explain each of the components of

break-even analysis.

8. Solve typical break-even problems manually and

with Excel.

After completing this chapter, you should be able to:


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The Importance of Management Science

Management scienceThe discipline of applying advanced analytical

methods to help make better decisions.

Devoted to solving managerial-type problems using

quantitative modelsApplications of management science

Forecasting, capital budgeting, portfolio analysis,

capacity planning, scheduling, marketing, inventory

management, project management, and productionplanning.


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Table 12 Successful Applications of Management Science


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Table 12 Successful Applications of Management Science (contd)


7/26Copyrigh t 2007 The McGraw-Hil l Companies. All r ights reserved. McGraw-Hil l / Irwin 17

Problem Solving Approaches

Managers tend to use aqualitative approachto

problem solving when

1.The problem is fairly

simple.

2.The problem is

familiar.

3.The costs involved

are not great.

Managers tend to use aquantitative approach

when

1.The problem is

complex.

2.The problem is not

familiar.

3.The costs involved

are substantial.

4.Enough time is

available to analyze

the problem.



Advantages of the Quantitative Approach

Directs attention to the essence of an analysis:to solve a specific problem.

Improves planning which helps prevent future

problems

Results in more objective decisions than purely

qualitative analysis.

Incorporates advances in computational

technologies to managerial problem-solving.



Models

A ModelAn abstraction of reality. It is a simplified, and often

idealized, representation of reality.

Examples : an equation, an outline, a diagram, and a map

By its very nature a model is incomplete.Provides an alternative to working with reality

Symbolic models

Use numbers and algebraic symbols

Mathematical models

Decision variables

Uncontrollable variables



Deterministic versus Probabilistic Models

Deterministic modelsUsed for problems in which information is known with

a high degree of certainty.

Used to determine an optimal solution to the problem.

Probabilistic modelsUsed when it cannot be determined precisely what

values (requiring probabilities) will occur (usually in

the future).


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Figure 11 The Management Science Approach


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Figure 12 DSS Framework

Source: E. Turban, Jay Aronson, and Ting-Peng Liang, Decision Support Systems and Intelligence Systems , 7th ed. (Upper Saddle River, NJ: Prentice Hall, 2005), p. 109.


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Exhibit 1-1 Excel Spreadsheet


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Exhibit 1-2 Functions Screen


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Exhibit 13 Add-in Options


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Breakeven Analysis

Breakeven analysis (cost-volume analysis)Is concerned with the interrelationship of costs,

volume (quantity of output or sales), and profit.

The Break-Even Point (BEP)

The volume for which total revenue and total cost areequal.

The dividing line between profit and loss; sales higher

than the break-even point will result in a profit, while

sales that is lower than the break-even point will resultin a loss.

Where you get out of the red.


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Breakeven Analysis

Breakeven analysis (cost-volume analysis)Is concerned with the interrelationship of costs,

volume (quantity of output or sales), and profit.

Components of Break-Even Analysis

Volume:the level of output of a machine, department,or organization, or the quantity of sales.

Revenue:the income generated by the sale of a

product. Total revenue= revenue per unit (selling

price per unit) multiplied by units (volume) sold.Costs:costs that must be taken into account

Fixed costs are not related to the volume of output.

Variable costs increase and decrease with output.


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Assumptions of Break-Even Analysis

The revenue per unit is the same for allvolumes.

The variable cost per unit is the same for all

volumes.

Fixed cost is the same for all levels of volume.

Only one product is involved.

All output is sold.

All relevant costs are accounted for, andcorrectly assigned to either the fixed cost

category or the variable cost category.


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Figure 13 Total Revenue Increases Linearly as Volume Increases


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Figure 14 Fixed Costs


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Figure 15 Total Variable Cost


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Figure 16 Total Cost


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Figure 17 Profit and the Break-Even Point

Profit


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Example 11


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Exhibit 14 Break-Even Analysis


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Exhibit 15 Goal Seek Input Screen

Exhibit 16 Goal Seek Output Screen

Quantitative techniques chap01

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