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” .

Interpretation and Sensitivity Analysis Analyzing results and implementing a solution . Solution Solving the model to obtain the optimal solution 3.Steps in Decision Modeling 1. Formulation Translating a problem scenario from words to a mathematical model 2.

Steps in Modeling .

up to $4000 max • Personal exemption = 2 x $3200 = $6400 • Standard deduction = $10.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.000 • No other deductions .

600 $14.401 to $119.601 to $59.Tax Brackets Taxable Income up to $14.400 $59.950 Percent of Taxable Income 10% 15% 25% .

units) . units) Costs = (Fixed cost) + (Cost per unit) x (Num.Example Model: Break-Even Analysis Profit = Revenue – Costs Revenue = (Selling price) x (Num.

so Revenue = Costs BEP = Fixed cost (Selling price) – (Cost per unit) .The Break Even Point (BEP) is the number of units where. Profit = 0.

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Models Defining the Problem • Conflicting viewpoints • Impact on other departments • Beginning assumptions • Solution outdated .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 .

Sign up to vote on this title
UsefulNot useful