Session # 1

Introduction to Operations Research

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Course: Operations/ Optimization Models for

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Shounak Basak
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Managerial Decisions Pa
Room no. 6, Library Building,
Programme: TATA GMP-2021 XLRI – Xavier School of Management,
Term II, 2021 Jamshedpur – 831001
Jamshed1
Phone: 0657 – 665 – 3424
Email: shounak@xlri.ac.in

Shounak Basak
PODS Area, XLRI – Xavier School of Management
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Operations Research

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Analytical techniques

Management Science involves the use of advanced analytical techniques to help

make better decisions

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What kind of decisions?

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Management science

Management Science attempts to deal with problems in social science through a scientific approach

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Assumptions in following this scientific approach plays an important role
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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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History

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• There have been evidence of use of scientific techniques as far back as the Egyptian time

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• Operations research as a stream was identified when scientists were engaged by military to carry out “research” in strategic
“operations”

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• The air force planning done by this approach was instrumental in winning the battle of Britain

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Shounak Basak
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PODS Area, XLRI – Xavier School of Management
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History

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Two factors contributed to the rise of Operations Research

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• Advancements like simplex method, dynamic programming, queuing theory in the 1940s and 1950s

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Introduction of computers to carry out complex numerical calculations in the 1990s

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Shounak Basak
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PODS Area, XLRI – Xavier School of Management
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Scientific approach

1. Define problem and gather data

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2. Formulate a mathematical model to represent the problem

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3. Develop a solution procedure

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4. Apply it on the data

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5. Analyse the solution to recommend appropriate actions

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Concept of optimization
Cost incurred per unit for a product produced behaves in the following manner. What should be the ideal amount of product produced.

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Concept of optimization
Cost incurred per unit for a product produced behaves in the following manner. What should be the ideal amount of product produced.

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel work

1. Using Formula

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2. Installing and enabling Excel Add-In

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3. Plots

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel work

Plotting graphs

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• Example 1_1

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel based problem
Problem # 1.1

There is a fish farm owned by Mr. Snowball which has been recently acquired from Mr. Jones. Mr. Jones was not a
popular owner and the employees of the farm feel Mr. Snowball, a man of sound business acumen would do justice to

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the farm. Mr. Snowball is known to be innovative and enterprising, and uses quantitative approach to decision making.

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Mr. Snowball decides to conduct a break even analysis of the farm’s profit. Following data are available to carry out the

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analysis.

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Monthly production of fish: 200 Kg

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Monthly fixed cost of the farm (includes salaries and other overheads): Rs. 80000

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Variable cost of farming each Kg of fish: Rs. 600

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Market price of each Kg of fish at local market: Rs. 1400

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Was Mr. Jones making profit?

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel based problem
Problem # 1.2

Mr. Snowball intends to project himself as a benevolent owner and raises the salary for the employees. This directly
affects the monthly fixed cost of the farm and the fixed cost is found to be 200000. If Mr. Snowball decides to conduct a

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detailed analysis of the farm. Could you figure out what would be the minimum quantity of fish produced that would

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keep the farm in profit?

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Break even analysis
Breakeven Analysis

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Cost:

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Fixed Cost: remains constant with respect to production volume

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Variable Cost: varies with number of units produced

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Total Cost: sum of fixed cost and total variable cost

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Revenue: price at which an item is sold
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Total Revenue: price times the volume sold

Profit: net revenue left after deducting total cost

Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Break even formula
Breakeven Analysis

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𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡: 𝑐𝑓 Break even point is that

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𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡: 𝑐𝑣 volume beyond which the firm

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𝑉𝑜𝑙𝑢𝑚𝑒 𝑢𝑛𝑖𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 : 𝑣

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earns positive profit

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𝑃𝑟𝑖𝑐𝑒: 𝑝

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𝑃𝑟𝑜𝑓𝑖𝑡 ≥ 0

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𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑐𝑓 + 𝑣𝑐𝑣 𝑣𝑝 − 𝑐𝑓 − 𝑣𝑐𝑣 ≥ 0
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𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑣𝑝 𝑣 𝑝 − 𝑐𝑣 ≥ 𝑐𝑓
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑣𝑝 − 𝑐𝑓 − 𝑣𝑐𝑣 𝑐𝑓
𝑣≥
𝑝 − 𝑐𝑣

Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Break even graph

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Revenue

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Break even point

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Total cost

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Fixed cost

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel work

Excel Goal Seek Function

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• Example 1_2

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Shounak Basak
12/10/2021
PODS Area, XLRI – Xavier School of Management
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Excel based problem
Problem # 1.3

Now, try to answer the question asked in Problem no. 1.2 by using the excel goal seek function. Do they match?

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Shounak Basak
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PODS Area, XLRI – Xavier School of Management
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Excel based problem
Problem # 1.4

Mr. Snowball is a man of vision and intends to make the farm a model farm. There is an intention to build a windmill to
make the farm self-sufficient in electricity. Therefore, Mr. Snowball decides to save a part of the profit to build a corpus

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that could be used for the construction of the windmill. After careful calculation, it is found that every month at least Rs.

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200000 of profit needs to be booked to make the corpus. What would be the production of fish to achieve this goal?

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Additionally, Mr. Napoleon, a partner in the farm, does not agree with the proposal. Therefore, Mr. Snowball decides to

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show the excel sheet to showcase in front of everybody, the minimum production requirement along with the intended

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profit.

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PODS Area, XLRI – Xavier School of Management
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References
Material for the Lecture has been sourced from: Selected References:

Stevenson, W. J., & Ozgur, C. (2006). Introduction to management science with

spreadsheets and student CD. McGraw-Hill, Inc...
Hillier, F. S., & Lieberman, G. J. (2012). Bodhibrata Nag and Preetam

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Basu,“Introduction to Operations Research”.

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Vanderbei, R. J. (2015). Linear programming. Heidelberg: Springer.
G. Hadley, Linear Programming, Addison-Wesley, Reading, Massachusetts, 1962

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Shounak Basak
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PODS Area, XLRI – Xavier School of Management
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