Managerial decision modeling with spreadsheets by stair render chapter 01

Chapter 1:Introduction to Managerial Decision Modeling © 2007 Pearson Education... What is Decision Modeling?A scientific approach to managerial decision making • The development of a

Chapter 1:

Introduction to Managerial

Decision Modeling

© 2007 Pearson Education

What is Decision Modeling?

A scientific approach to managerial decision making

• The development of a (mathematical) model of a real-world scenario

• The model provides insight into the solution of the managerial problem

Types of Decision Models

• Deterministic Models

Where all the input data value are known with complete certainty

• Probabilistic Models

Where some input data values are uncertain

Quantitative vs Qualitative Data

The modeling process begins with data

• Quantitative Data

Numerical factors such as costs and

revenues

• Qualitative Data

Factors that effect the environment which are difficult to quantify

Spreadsheets in Decision Making

• Computers are used to create and solve models

• Spreadsheets are a convenient alternative to specialized software

• Microsoft Excel has extensive modeling capability via the use “add-ins”

Steps in Decision Modeling

1 Formulation

Translating a problem scenario from words to a mathematical model

2 Solution

Solving the model to obtain the optimal solution

3 Interpretation and Sensitivity Analysis

Analyzing results and implementing a solution

Steps in

Modeling

Example Model: Tax Computation

Self employed couple must estimate and

pay quarterly income tax (joint return)

• Income amount is uncertain

• 5% of income to retirement account, up to $4000 max

• Personal exemption = 2 x $3200 = $6400

• Standard deduction = $10,000

• No other deductions

Tax Brackets

Percent of

Example Model: Break-Even Analysis

Profit = Revenue – Costs

Revenue = (Selling price) x (Num units)

Costs = (Fixed cost) +

(Cost per unit) x (Num units)

The Break Even Point (BEP) is the number of units where;

Profit = 0, so

Revenue = Costs

BEP = Fixed cost

(Selling price) – (Cost per unit)

Possible Problems in Developing Decision Models

 Defining the Problem

• Conflicting viewpoints

• Impact on other departments

• Beginning assumptions

• Solution outdated

Possible Problems in Developing Decision Models

 Developing a Model

• Fitting the textbook models

• Understanding the model

 Acquiring Input Data

• Using accounting data

• Validity of data

Possible Problems in Developing Decision Models

 Developing a Solution

• Hard to understand mathematics

• Limitations of only one answer

 Testing the Solution

 Analyzing the Results

 Implementation