CHAPTER 16 APPLICATION OF QUANTITATIVE TECHNIQUES IN PLANNING, CONTROL AND DECISION MAKING - I Rationale in Using Quantitative Techniques Businessmen are continually faced with making important decisions which consider a number of veriables namely: (a) The factors that are relevant to the problem they ftice (b) The various alternatives that are available to them (©) The logical consequences of the possible alternatives (d) The best alternative in terms of profits and realization of objectives. Increasingly, management accountants are devoting more attention to providing ‘management and other interested parties with data they can use in cost control, planning and decision making rather than emphasizing cost accumulation and determination. Emphasis is now given on the predictive ability of data rather than solely emphasizing the past. Accountants are now integrating planning and control models within the accounting system for-monitoring actual results agairist plans to provide feedback for corrective action. Accountants must adapt to the change and equip themselves with a background in mathematical methods if they are to supply the kind of information management currently demands. ‘The quantitative analysis is a problem-solver which attempts to formulate the decision problem in mathematical terms. ‘A mathematical model requires (1) specification of a complete list of variable factors that are relevant to the problem at hand and (2) specific quantifiable relationships among those variables. The model can help the decision maker in making a choice which is compatible with his goals as well as enabling him to consider the variables which are re'evant in making an appropriate decision.‘The accountant must concern also himself with the decision-making process since he is the one who must ‘design the accounting information system. To be effective in this role, the accountant must acquaint himself with the objectives, assumptions and requirement of the decision models employed. A decision mode} is not intended to be the sole basis for making a decision. Rather, it is a tool“that the decision maker uses in addition to other inputs in arriving at a decision. The use of a decision model helps to ensure that the alternatives are logically evaluated in the light of a specific criterion and explicit assumptions, ‘The more commonly used quantitative models for planning, control and decision making are as follows: Probability Payoff (Decision) Tables Value of Perfect Information Decision Tree Learning Curve Simulation Technique Monte Carlo Techniq Sensitivity Analysis Queuing 0. Linear Programming c |. Program Evaluation and Review Technique - Critical Path Method (PERT - CPM) 12. Gantt Chart 13. Inventory Modeling 14, Regression Analysis (discussed in Chapter 11) 15. Present Value Concept (will be discussed in Chapter 19) Seve ene ue An exhaustive treatment of the above-mentioned quantitative techniques is beyond the scope or intent of this Chapter. Rather a fair understanding and appreciation of the concepts are expected from the reader. é PROBABILITY Decision Making under Certainty Decision making under ceriainty means that for each decision action there is only one event and therefore only a single outcome for each action. When an event is certain, there is a 100% chance of occurrence, hence the probability is 1.0.Decision Making under Uncertainty Decision making under uncertainty, which is more common in reality, involves several events for each action with its probability of occurrence. The decision maker may know the probability of occurrence of each of the events because of mathematical proofs or the compilation of historical evidence. In the absence of these two bases, he may resort to the subjective assignment of probabilities. Management may know enough about the ‘likelihood of each environment to attach probabilities of occurrence to each alternative. If So, management. certainly wants to select the alternative that appears to produce the largest Outcome as long as that altemative does not expose the company to a high probability of a large loss. The payoffs can be reduced using each alternative to one figure by weighing the possible payoffs according to the relative probabilities that the various conditions will occur. Payoff is the value assigned to different outcomes from a decision and may be positive or negative. Briefly, information is deemed to meet the cost-benefit test if the expecied! value of a decision (net of the costs of the information) increases as a result of obtaining additional information. The process in deciding whether thé cost- benefit criterion has been met is called information economics. Assigning Probabilities Because decision makers normally deal with uncertainty, rather than certainty, they must estimate the probability of various outeomes. It is necessary to assign Probabilities that represent the likelihood of various events occurring. A Probability distribution describes the chance or likelihood of each of the collectively exhaustive and mutually exclusive set of events, The probability distribution can be based on past data if management believes that the same forces will continue to operate in the future. Probability provides a method for mathematically expressing doubt or assurance about the occurrence of a chance event. The probability of an event varies fromOto 1. - (a) A probability of 0 means the event cannot occur, whereas a probability of 1 means the event is certain to occur.(b) A probability between 0 and 1 indicates the likelihood of the event’s occurrence, ¢.g,, the probability that a fair coin will yield heads is 0.5 on any single toss. ‘ ‘Types of Probabilities a. Objective probabilities are calculated from either logic or actual experience. For example, in rolling dice one would logically expect each face on a single die to be equally likely to turn up at a probability of 1/6. Alternatively, the die could be rolled a great many times, and the fraction of times each face turned up could then be used as the frequency or probability of occurrence. b. Subjective probabilities are estimates, based on judgment and past experience, of the likelihood of future events, Weather forecasts often include the subjective probability of rain. In business, subjective probability can indicate the degree of confidence a person has that a certain outcome will occur, .g., fture performance of a new employee. Basic Terms Used with Probability (1) Two events are mutually exclusive if they cannot occur simultaneously (e.g., heads and tails cannot both occur on a single toss of a ¢oin). (2) The joint probability for two events is the probability that both will occur. (3) The conditional probability of two events is the: probability that one will ‘occur given that the other hias already occurred. (4) Two events are independent if the occurrence of one has no effect on the probability of the other (e.g., rolling two dice). (a) Ifone event has an effect on the other event, they are dependent. (b) Two events are independent if their joint probability equals the product of their individual probabilities. (©) Two events are independent if the conditional probability of cach event equals its unconditional probability. Rules in Combining Probabilities The joint probability for two events equals the probability (Pr) of the first event multiplied by the conditional probability of the second event, given that the first has already occurred.Example: If 60% of the students at a university are male, Pr (male) is 6/10. If 1/6 of the male students have a B average, Pr(B average given male) is 1/6. Therefore, the probability that any given student (male or female) selected at random, is both male and has a B average is Pr(male) x PrtB\ male) = Primale > BY 60 x We = Io Pr(male > B) is 0.10; that is, the probability that the student is male and has a B average is 10%. ‘The probability that either one or both of two events will occur equals the sum oF their separate probabilities minus their joint probability. Example: \f two fair coins are thrown, the probability ihe least one will come up heads is Pr(coin #1 is heads) plus Pr(coin #2 is heads) minus Pr(coin #1 and coin #2 are both heads). or (0.5) + (0.5) = (0.5 x 0.5) = 0.75 Example: If in the earlier example 1/3 of all students, male or female, have a B average [Pr(B average) is 1/3], the probability that any given student either is male or has a B average is Primate) + PrBavg.) — Pr(Br\ male) = Primate or has B avg.) oo + Ws = -M0 © = 25/30 The term Pr(B © male) must be subtracted to avoid double counting those students who belong to both groups. The. probabilities for all possible mutually exclusive outcomes of a single experiment must add up to one.Example: Flipping two coins (H = heads, T = tails) Probability of IfCoin # Lis If Coin #2 is This Combination H H 0.25 H T 0.25 T H 0.25 r tics 0.25 Probability that one of the four possible 1.00 (certainty) combinations will occur Probability Distributions A probability aistribution specifies the values of the variables and their respective probabilities. Certain standard distributions seem to occur frequently in nature and have proven useful in business. Discrete distributions include the fo! lowing: (1) Uniform distribution, All outcomes are equally likely, such as the ‘flipping of one coin, or even of two coins, as in the example above. (2) Binomial distribution. Each trial has only two possible outcomes, e.g., accept or reject, heads or tails. This distribution shows the likelihood of each of the possible combinations of trial results. It is used in quality control. G) The Bernoulli distribution involves only one trial, whereas the binomial distribution deals with as many as necessary. ‘Thus, the binomial distribution reduces to the Bernoulli distribution when n is 1. (4) The hypergeometric distribution is similar to the binomial distribution. Itis used for sampling without replacement. (a) For finite populations, sampling without replacement removes each item sampled from the population, thus changing the composition of the population from trial to trial. (b) For large populations and small samples, the binomial distribution approximates the hypergeometric distribution and is computationally more convenient. . .(5) The Poisson distribution is useful when the event being studied may happen more than once with random frequency during a given period. Continuous distributions include the following: (1) Normal distribution. ‘The most important and useful of all probability distributions, it describes many physical phenomena, In samplirig, it describes the distribution of the sample mean regardless of the distribution of the population. It has a symmetrical, bell-shaped curve centered about the mean. For the normal distribution, about 68% of the area (or probability) lies within plus or minus | standard deviation of the mean, 95.5% lies within 2. standard deviations, and 99% lies within 3 standard deviations of the mean. (2) The exponential distribution is related to the Poisson distribution. It is the probability of zero occurrence in a time period T. (3) The t-istribution (also known as Student's distribution) is a special distribution used with small samples of the population, usually less than 30, with unknown population variance. (@) For large sample sizes (n > 30), the thdistribution is almost identical to the standard normal distribution (b) For small sample sizes (n < 30) for which only the saraple standard deviation is known, the t-distribution provides a reasonable estimate for tests of the population mean if the population is normally distributed (©) The t-distribution is useful in business because large samples are often too expensive. For a small sample, the t-statistic (from a t- table) provides a better estimate of the variance tian that from a table for the normal distribution. (A) The chi-square distribution is used in testing the goodness of fit between actual data and the theoretical distribution. In other words, it tests whether the sample is likely to be from the population, based on a comparison of the sample variance and the population variance.Ilustrative Problem 16.1. Decision Making under Uncertainty Payong Corporation is considering two new colors for their umbrella products - Sky Blue and Baby Pink. Either can be produced using the present faciliti Each product requires an increase in annual fixed costs of P400,000. The lucts have the same selling price of P100 and the same variable costs per unit of P80. : After studying past experience with similar products, management has prepared the following probability distribution: Event Probability For (Units Demanded) ‘Sky Blue umbrella ay Pink umbrella “5,000 0.0 Or 10,000 0.1 O41 y 20,000 02 0.1 30,000 04 02 40,000 02 0.4 50,000 OL On Lo 10 Management would like to know a. The break-even point for each product. b. Which product should be chosen, assumin the objective is to maximize expected operating income? Solution: a. Since both products have the same contribution margin pe unit of P20 (P100-P80) break-even point for each product will be the same computed as follows: 400,000 Break-event point = ay = 20,000 unitsb. (1) Determine the expected demand for the two umbrellas: 20,000 30,000 40,000 50,000 30,000 units 30,500 units (2) Compute the expected operating income of the two umbrellas. Baby Pink Sales 3,050,000 Variable Costs -2,440,000 Contribution Margin P 600,000 P 610,000 : Fixed Costs 400,000 __ 400,000 Operating Income P_200,000 P_210,000 ‘The Baby Pink umbrellas should be chosen because they have the higher expected income. PAYOFF (DECISION) TABLES Payoff (decision) tables are he|pful tools for identifying the best solution given several decision choices and future conditions that involve risk. A payoff table presents the outcomes (payoffs) of specific decisions when certain states of nature (events not within the control of the decision maker) ‘occur. Example: A dealer in luxury yachts may order 0, 1, or 2 yachts for this season’s inventory. The cost of carrying each excess yacht is PS0,000, and the gain for each yacht sold is P200,000. The situation may be described by a payoff table as follows:State of Nature = Season's Actual —_—_—Decision= Decision. Demand Order 0 Order f Dyachis 0 (50,000) (100.000) 1 yacht 0 200,000 150,000 2yechis 0 200,000” 400,000 The probabilities of the season’s demand are Pr Demand ‘O10 0.50 40 The dealer may calculate the expected value of each decisign as follows: Order Order 2 0.1 x P450,900) 9.4 x P(100,000) +05 x 200,000 +05 x 150,000 +04 _x 200,000 +04 x 490.000 EV(1) = B175.000 EV@ = Ezzso00 The decision with the greatest expected value is to order two yachts, so, in the absence of additional information, the dealer should order two. EXPECTED VALUE OF PERFECT INFORMATION Even though the P210,000 expected value of operating income of the Baby Pink umbrellas is higher than that of the Sky Blue umbrellas, management and/or owners may resist exposure to the pércentage involved in making a decision under risk.” The probabilities associated with which environmental conditions will actually occur are based on existing information, The company may decide to hire marketing analysts to obtain additional information on the environmental situation. The expected value of perfect information is the amount the company is willing to pay for the market analysts’ errorless advice. Assuming that the market analyst could indicate with certainty which condition would occur, a manager would decide with complete certainty. OF course, “perfect information” is not perfect in the sense of absolute predictions.Perfect information is the knowledge that a future state of nature will occur wth certainty, i.e., being sure of what will occur in the future. The expected value of perfect information (EVPI) is the difference between the expected value without perfect information and the return if the-best action is taken given perfect information. ‘Example (from the yacht dealer problem on pages 674 to 675): If the yacht dealer were able to poll all potential customers and they truthfully stated whether they would purchase a yacht this year (i.e., if perfect information about this year’s yacht sales could be purchased), what is the greatest amount of money the dealer should pay for this information? What is EVPI? If the dealer had perfect knowledge of demand, he/she would make the best decision foreach state of nature. The cost of the other decisions is the conditional cost of making other than the best choice. This cost may be calculated by subtracting the expected value from the expected value given perfect information. This difference measures how much better off the decision maker would be with perfect information. From the payofT table on page 675. we find the expected value of the best choice under each state of nature. 3 Expected Best Action Pr. State of Nature Best Action _ Payoft 1 Demand Buy 0 a) os Demand = 1 Buy! 200.000 100,000 04 Demand = 2 Buy 2 400,000 160,000 260,000 The dealer expects to make P260,000 with perfect information about future demand, and P225,000 if the choice with the best expected value is made. The expected value of perfect information (EVPI) is then Expected value with perfect information P260,000 Expected value of the best choice (225,000) EVPI = P 35,000 The dealer will not pay more than P35,000 for information about future demand because it would then be more profitable to make the expected value choice than to pay more for information,DECISION TREE Underlying Concept A decision tree is an analytical tool used in a problem in which a series of decision has to be made at various time intervals, with each decision influenced by the information that is available at the time it is made. In its simplest form, a decision tree is a diagram that shows the several decisions or acts and the possible consequences called events of each act. In a more elaborate form, the probabilities and the revenue and costs of each event’s ‘outcome are estimated and these are combined to give an expected value for the event. Decision trees provide a systematic framework for analyzing a sequence of interrelated decisions the managers may make over time. Stemming from the present investment decisions are alternative scenarios thet depend on the ‘occurrence of future events and consequences of those events. Decision tree analysis encourages the study and understanding of these scenarios. Advantages of Decision Tree Analysis ‘Some benefits that may be derived from the use of Decision Tree Analysis are 1. Decision tree is an’ effective means of presenting the relevant information needed by management in an investment problem. Such relevant information includes choices, risks, monetary gains, and objectives. 2. Combination of action choices with different events or results of action that chance or other uncontrollable circumstances partially affect can be better presented and studied. 3. The interactions of the impact of future events, decision, alternatives, uncertain events and their possible payoffs can be shown with greater cease and clarity. 4. Data are presented in a manner that enables systematic analysis and better decisions.Limitations of Decision Tree Analysis A decision tree does not give management the answers to an investment problem. 4 It does not identify all the possible events or does it list all the decisions that must be made on a subject under analysis. The interactions of such decision with the objective of other parts of the business organization would be too complicated to compute manually. The use of computers will be suitable when studying the effect of variations in figures and/or the events involved. © Decision tree analysis treats uncertain alternatives as if they were discrete well-defined possibilities. It should be remembered that uncertain situations depend not only on one variable but on several independent or partialiy related variables subject to such chance influences. Steps in Making a Decision Tree ‘The requirements for the decision tree preparation are 1. Identification of the points and decision and the alternatives available at each point. Determination of the points of uncertainty and the type or range of alternative outcomes at each point. Estimates of the probabilities of different events or results of actions. Estimates of the costs and gains of various events and actions. Analysis of the alternative values in choosing a course of action. Because the time between successive decision stages on a decision tree may be long, it would be more realistic to consider the time value of future earnings and other cash flows. In others the discounted cash flow approach may be applied on analyzing various investment alternatives. This is discussed extensively in Chapter 19.Illustrative Problem 16.2. Preparation of Decision Tree After several years of supplying gelatin bars to several supermarket chains, the Castillo family decided it was time to shift to another venture in the light of increasing competition from other gelatin manufacturers. They would want to introduce a type of gelatin ice cream. Based on the family accountant’s estimates, if the sales are high, the total contribution margin will be P300,000. If sales are low, the total contribution margin will be P50,000. Fixed costs will be P150,000. The accountant attaches 4 probability of 0.5 for high sales and 0.5 for low sales. The Castillo family can conduct a survey of-yarious health food outlets to determine the true demand for the new product. “The reliability of the survey is such that it will signal high sales 70 percent of the’times when actuat sales will be high, and signal low sales 90'percent of the time’ when actual sales will be low. The costs of such a survey are P20,000. Assuming that the Castillo family bases its decisions on expected value: a) What action will they take without the survey? b) Should the Castillo family take the survey? What should their decision be? ; ©) How much will they be willing to pay for perfect information? Solution: a. High 300,000 - P150,000 50,000 - P150,000 sales. Decision: Accept projectactual high-sales actual low-sales survey signal for high-sales state survey signal for low-sales state Probability yxancm = Pr Yu = 0.10.5) + 0.70.5) =04 PrY, = 0.9 (0.5) + 0.3 (0.5) 9, Pr (H/Y,) PriLsY) Pr(H/Y,) Pr (LY) = 1-025The decision tree will be as follows: : Profit His les + ahs P 150,000 - P100,000 + P1S0,000 EV = + P25,000 5 EV =+ P47,500 = P100,000 Predict high +P150,000 EV = - P37,500 = P100,000, ae \ Do not 6 produce The Castillo famil ‘cost of the survey. should take the survey. The expected value of the project, less the 47,500 - P20,000 = 27,500 . Without the survey, the expected value of the project is: 25,000Working through the Bayesian analysis in part (b), assuming perfect information, we get: Pw) = 0S “a PAY) = 0.5 PCH) = 1.0. PY) = LO Hist + P1S0,000 P= 05 sales, Produce EV = +P25,000/ . OS Low = P100,000 : sales EV =+P25,000 produce PO. Preset P 150,000 pee OS high sales = EV =+P75,000 \ ” P, Po Tow sales Expected value of perfect information = 'P75,000 - P25,000 50,000 LEARNING CURVE Learning curves reflect the increased rate at which people perform tasks as they gain experience, The time required to perform a given task becomes progressively shorter, but this technique is only applicable to the early stages of production or of any new task. Ordinarily, the curve is expressed as a percentage of reduced time to complete a task for each doubling of cumulative production. Research has shown learning curve percentages to be between 60% and 80%, In other words, the time required is reduced by 20% to 40% each time cumulative production is doubled, with 20% being common.One common assumption made in a learning curve model is that the cumulative average time per unit is reduced by a certain percentage each time production doubles. : Example: Given an 80% learning curve model based on the first assumption stated above, the following performance is expected during the early stages of the manufacture of a new product: Cumulative Cumulative Number of Tasks Average Time per Unit 100 3.0 200 : 2.4 (3.0 x 80%) 400 1,92 (2.4 x 80%) 800 1.536 (1.92 x 80%) 1,600 1.228 (1.536 x 80%) Graphical presentation: Productivity Experience If the average time for 100 units in the example above were 3 minutes per unit, the total time would be 300 minutes. At an average time of 2.4 minutes for 200 units, the total time would be 480 minutes. In other words, the additional 100 units required only 180 minutes (480 — 300), or 1.8 minutes per unit. SIMULATION TECHNIQUES Simulation is a technique for experimenting with logical and mathematical models using a computer. Despite the power of mathematics, many problems cannot be solved by known analytical methods because of the behavior of the variables and the complexity of their interactions, eg. a. Corporate planning models b. Financial planning models c. New product marketing modelsd. Queuing system simulations e. Inventory control simulations Experimentation is neither new nor uncommon in business. Building a mockup of a new automobile, having one department try out new accounting procedures, and test-marketing a new product are all forms of experimentation. In effect, experimentation is organized trial and error using a model of the real world to obtain information prior to full implementation. Models can be classified as cither physical or abstract. (@) Physieal models include automobile mockups, airplane models used for wind-tunnel tests, and breadboard models of electronic circuits. (b) Abstract models may be pictorial: (architectural plans), verbal (a proposed procedure), or logical-mathematical. Experimentation with logical-mathematical models can involve many time-consuming calculations. Computers have eliminated much of this costly drudgery and have led to the growing interest in simulation for management. ‘The simulation procedure has five steps: a. Define the objectives. The objectives serve as guidelines for all that follows. The objectives may be to aid in the understanding of an existing system (e.g., an inventory system with rising costs) or to explore alternatives (e.g. the effect of investments on the firm’s financitl structure). A third type of objective is estimating the behavior of som new system such as a production line. Thus, a simulation can be designed to ask “what-if” questions, such as whether modifying the actual system will result in better performance. b. Formulate the model. The variables to be included, their individual behavior, and their interrelationships must be defined in precise logicai- mathematical terms. The objectives of the simulation serve as guidelines in deciding which factors are relevant. Moreover, inputs reflected in the model are of two kinds: controllable and probabilistic. The former are those subject to the decision-makers’ influence, and the latter involve circumstances beyond their control, such as general economic conditions or the acts of competitors.¢. Validate the model. Some assurance is needed that the results of the experiment will be realistic. ‘This assurance requires validation’ of the model — often using historical data. If the model gives results equivalent to what actually happened, the model is historically valid. Some risk remains, however, that changes could make the model invalid for the future. d. Design the experiment: Experimentation is sampling the operation of a system. For example, if a particular policy is simulated on an inventory model for two years, the results are a single sample. With replication, the sample size can be increased and the confidence level raised. The number of runs to be made, length of each run, measurements to be made, and methods for analyzing the results are all part of the design of the experiment. The experiments also may take the form of asking “what-if” questions, that is, varying an input or assumption to ascertain the effect on the results. ¢. Conduct the simulation ~ evaluation results. The simulation should be conducted with care. The results are analyzed using appropriate statistical methods. These results constitute outcomes that permit evaluation of the probabilities of real-world performance. Advantages and Limitations of Simulation The advantages of simulation are as follows: a, Time can be compressed.” A corporate planning model can show the results of-a policy for 5 years into the. future, using only minutes of ies can be explored. With simulations, managers can ask what-if questions to explore possible policies, providing management with a powerful new planning tool. z c. Complex systems can be analyzed. In many cases, simulation is the only possible quantitative method for analyzing a complex system such as a production or inventory system, or the entire firm.The tumitations of simulation are as follows: " 8. Cost. Simulation models can be costly to develop, They can be justified only if the information to. be obtained is worth more than tlie costs to develop the model and carry out the experiment. b. Risk of error. A simulation results in a prediction of how an actual system would behave. As in forecasting. the prediction may be in error. ” MONTE CARLO TECHNIQUE ‘The Mente Carlo technique is often used in simulation to generate the individua! values for a random variable: A random number generator is used to Produce numbers with a uniform probability distribution (equal likelihoods of occurrence). ‘The second step: is to transform these numbers into values consistent with the desired distribution. : - ‘The performance of a quantitative model may be investigated by randomly selecting values for each of the variables in the model (based on the probability distribution of each variable) and then calculating the value of the solution. If this process is performed a large number of times, the distribution of results from the model will be obtained. Exampie.” Knew marketing model includes a factor for a competitor's introduction of a similar product within | year. Management estimates a 50% chance that this event will happen... For each simulation, this factor must be determined, perhaps by flipping a coin, or by putting two numbers in a hat and selecting one number. Rardom numbers between 0 and 1 could.be generated. Numbers under 0.5 would signify introduction of a similar product; numbers over 0.5 would indicate the nonoccurrence of this event. SENSITIVITY ANALYSIS ‘Sensitivity analysis describes how sensitive the linear programming optimal solution is to a change in any one number. Sensitivity analysis answers what-if questions about the effect of change in prices or variable costs; changes in value: addition or deletion of constraints, such as available machine hours; and changes in industrial coefficients, such as the labor-hours required in manufacturing in a specific unit.‘After a problem has been formulatea into any mathematical model, it may be subjected to sensitivity analysis. This approach is especially useful and significant when probabilities of states of nature and decision payofis are derived subjectively rather than by using objectively quantifiable information. A trial-and-error method may be adopted in which the sensitivity of the solution to changes in any given variable, parameter, or other assumption is calculated. (1) The risk of the project being simulatea may also be estimated. (2) The best project may be one that is least sensitive to changes in probabilistic (uncertain) inputs. (3) A. sensitivity analysis may indicate whether expending additional resources to obtain better forecasts of future conditions is cost justified. In linear programming problems, sensitivity is the range within which a constraint value, such as a cost efficient or any other variable, may be changed without changing the optimal solution. Shadow price is the synonym for sensitivity in that context. In the application of discounted cash flow methods (¢.g., net present value), a sensitivity analysis might be performed to ascertain the effects of variability of the discount rate or periodic eash flows. Financial planning models, including those for cash flows and capital budgeting, are other significant applications of sensitivity analysis. For example, changes in selling prices or resource costs may affect available cash and require more or less short-term borrowing. Still another application is the calculation of the margin of safety in a CVP analysis. :QUEUING Queuing is often referred to as Waiting line analysis. Quewing ean oceur in many situations and in a variety of forms. However, every queuing problem involves four basic issues. 1). Input mechanisms 2) Line or queue discipline 3) Service facilities, and 4) Output The characteristics of these four items describe the queuing model of concern. With adequate data on the population to be serviced, the queuing and service characteristics, analytic solution of the queuing problem may be feasible. Many queuing problems are so complex that simulations must be used to “solve” them. The mathematical deviation of systems is moderately complex even for the simpler queuing problems and is beyond the scope of this Chapter.