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Chapter 1 (Introduction)

## Advertising Problem (UW Lecture) 1.8 1.21

An illustration of the management science approach to a problem. At the University of Washington,
this is the very first lecture in the core MBA class on management science. While it includes some
advanced topics (Solver, nonlinear objectives, etc.) it can be taught entirely on the spreadsheet in a
very intuitive way, and has proven to be a good introduction to the power of Solver. The next
several lectures then would need to back up and cover more of the fundamentals of linear
programming, modeling, the Solver, etc.

| 
 1.1  |   
 
Special Products Break-Even Analysis

## The latest new-product proposal is a limited edition grandfather clock.

Data:
If they go ahead with this product, a fixed cost of \$50,000 is incurred.
The variable cost is \$400 per clock produced.
Each clock sold would generate \$900 in revenue.
A sales forecast will be obtained.

* 
 
  
  
 

| 
 1.2  |   
 
Expressing the Problem Mathematically

Decision variable:
* o Number of grandfather clocks to produce

Costs:
Fixed Cost o \$50,000 (if * > 0)
Variable Cost o \$400 *
Total Cost o
0, if * o 0
\$50,000 + \$400 * if * > 0

Profit:
Profit o Total revenue Total cost
Profit o 0, if * o 0
Profit o \$900* (\$50,000 + \$400*) o \$50,000 + \$500*, if * > 0

| 
 1.3  |   
 

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| 
 1.4  |   
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Analysis of the Problem

 
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Re ene =
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oss
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  
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| 
 1.5  |   
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Management Science Interactive Modules

Sensitivity analysis can be performed using the Break-Even module in the Interactive
Management Science Modules (available on your MS Courseware CD packaged with
the text).
Here we see the impact of changing the fixed cost to \$75,000.

| 
 1.6  |   
 

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| 
 1.7  |   
 

Parker Mothers is a manufacturer of childrens toys and games. One of their hottest
selling toys is an interactive electronic Harry Potter doll.

Some data:
Unit Variable Cost: \$48
Unit Selling Price: \$65

Parker Mothers has analyzed past data for the Harry Potter doll (and other similar toys),
and determined that sales are affected by a number of factors:
the season (e.g., more at Christmas, more when a new Harry Potter book or movie is released,
etc.),
the size of the sales force devoted to the product,

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
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!!!!"

| 
 1.8  |   
 
Predicting the Sales Level

After performing a statistical regression analysis, they estimate that sales for the quarter will be
approximately related to the season and advertising budget, as follows:

## Sales ( easonality actor)  2000 35 \$ dvertising 

Seasonality Factors:
Q1: 1.2 (publication of new Harry Potter book)
Q2: 0.7
Q3: 0.8
Q4: 1.3 (Christmas and expected release of new Harry Potter movie)

Sales

| 
 1.9  |   
 

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| 
 1.10  |   
 
X    
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43
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| 
 1.11  |   
 
The Excel Solver

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33
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3
3 
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4& #  6 7  2 4&&&
43
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| 
 1.12  |   
 
The Optimized Solution

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3
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4& #  6 7  2 4&&&
43
44  2344

| 
 1.13  |   
 

   
X 
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
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X     
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
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
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 * 
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     .X  XXX     
.
        
         

X    .X  X    X 

| 
 1.14  |   
 
Four Quarters Solver Optimized

0 \$ 1   ;
X    
 '  (
\$ 2 /
   2
 #  6 7  2 4&&&
  
! 384 &8 &8/ 38X
/
 
3&       
33 9 ) 234 2 XX/ 2 23  2X&X
34
3X         
3 #:    
3X &4 /4 4&3  4X
3
3 
   233X&3& 2 44X/ 2X3& 23X34/3X 2X &X443
3 \$ * 
 2/X  34 2X343&4 2X 4 2   4 243X3 /
3/ ;  ) 24  / 233&X 23 & // 2X XX3 2/ &&X
3
4& 9 ) \$ 234 2 XX/ 2 23  2X&X
43 #  6 7  2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X  2344 243/ 2 3/ 233 2X &X

| 
 1.15  |   
 
esidual Effect
0 \$ 1   ;
X    
 '  (
\$ 2 /
   2
 #  6 7  2 4&&&
  
! 384 &8 &8/ 38X
/ 9 )   2&&&&
 
3&       
33 9 ) 234 2 XX/ 2 23  2X&X
34
3X         
3 #:    
3  /3 /&4 3/ X &4X
3
3 
   23&XX& 2&/&/ 243 234&&4X 2X4&
3 \$ * 
 2&3& 2X3  2X/443 2//// 24 3X33
3/ ;  ) 2434  23X4//4 23X XX 2X3 &X 2/  
3
4& 9 ) \$ 234 2 XX/ 2 23  2X&X
43 #  6 7  2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X  23&3/  2 3 2X/ 2344 & 2X& &/
0 \$ 1
  
! 384 &8
/ 9 )   &&&&
3X     
3 #:    
\$4&&&-X &8\$33-&8X\$/"" 14&&&-X &8133-&8X\$33""
  ;
3X    
3 4&&&-X &833-&8X133"" 4&&&-X &833-&8X33"" \$3 <3 "

| 
 1.16  |   
 
esidual Effect (Solver Optimized)

0 \$ 1   ;
X    
 '  (
\$ 2 /
   2
 #  6 7  2 4&&&
  
! 384 &8 &8/ 38X
/ 9 )   2&&&&
 
3&       
33 9 ) 23X ,2433 / 23X& 2 / 2XX3&&
34
3X         
3 #:    
3 3 3X& X 3  3/ /4
3
3 
   233 X 2X / X 2X 43 2   2X3X
3 \$ * 
 2/&& & 24 4X3 2 / X 23&X 24XX/ 
3/ ;  ) 2X&   23& 4& 23 / 24X& 2/4/X//
3
4& 9 ) \$ 23X ,2433 / 23X& 2 / 2XX3&&
43 #  6 7  2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X  2/ &43 2/XX ,23 234/4 2X4///

| 
 1.17  |   
 
Solver Options

| 
 1.18  |   
 
esidual Effect (Solver e-Optimized)

0 \$ 1   ;
X    
 '  (
\$ 2 /
   2
 #  6 7  2 4&&&
  
! 384 &8 &8/ 38X
/ 9 )   2&&&&
 
3&       
33 9 ) 234/& 2& 2343 X3 243 2X4 X3
34
3X         
3 #:    
334 // X 3  3/ / 3
3
3 
   233334 2 X 3 2X 43 2   2X33
3 \$ * 
 2/4 4X 2X43&4& 2 / X 23&X 24X4  4
3/ ;  ) 24 3 3 233X 23 / 24X& 2/43 
3
4& 9 ) \$ 234/& 2& 2343 X3 243 2X4 X3
43 #  6 7  2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X  2 X 23 24  23/  2X4/4X

| 
 1.19  |   
 
esidual Effect with Budget (Optimized)

     
X 
 
   
 
    
     
  
 8 8 8 8X
     
  
. 
    

   . XX     X   

X     
      
    X X

 

.XXX X . XX   X.
 * 
    .. XX .  .  .
     .   X . . 
.
     . XX     X 
          

X       .  X  X 

| 
 1.20  |   
 