Lecture Introduction to Management Science with Spreadsheets: Chapter 1 - Stevenson, Ozgur

Chapter 1 Introduction to management science, modeling, and excel spreadsheets, after completing this chapter, you should be able to: Describe the importance of management science, describe the advantages of a quantitative approach to problem solving, list some of the applications and use of management science models, discuss the types of models most useful in management science, demonstrate the basic building blocks and components of Excel.

Stevenson and Ozgur

First Edition

Introduction to Management Science

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

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Learning Objectives (cont’d)

6 Describe the basic nature and usefulness of

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The Importance of Management Science

The Importance of Management Science

• Management science

–The discipline of applying advanced analytical

methods to help make better decisions

–Devoted to solving managerial-type problems using quantitative models

• Applications of management science

–Forecasting, capital budgeting, portfolio analysis,

capacity planning, scheduling, marketing, inventory management, project management, and production planning

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Problem Solving Approaches

Problem Solving Approaches

• Managers tend to use a

qualitative approach to

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 a

quantitative 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

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Advantages of the Quantitative Approach

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.

–By its very nature a model is incomplete.

–Provides an alternative to working with reality

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Deterministic versus Probabilistic Models

Deterministic versus Probabilistic Models

• Deterministic models

–Used for problems in which information is known with

a high degree of certainty

–Used to determine an optimal solution to the problem

• Probabilistic models

–Used when it cannot be determined precisely what

values (requiring probabilities) will occur (usually in the future)

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Breakeven Analysis

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 are equal

–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 result

in a loss

–Where you get “out of the red.”

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Breakeven Analysis

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

Assumptions of Break-Even Analysis

• The revenue per unit is the same for all

volumes.

• 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, and

correctly assigned to either the fixed cost

category or the variable cost category.

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Profit

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Example 1–1

Example 1–1

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