Management Science 2nd Semester SY.

2020-2021

Management Science
OBJECTIVE:
 Define management science.
 Discuss the relevance of management science in decision-making.
 Develop a working-knowledge on how mathematical models are used in quantitative analysis.

TIME FRAME: 4.5 hours

“The measure of success at strategic pricing is not how much it increases price but how
much it increases profitability."
- Wal-Mart

MANAGEMENT SCIENCE
Management science is an approach in problem solving
Management Science is an application of
and decision making which uses quantitative analysis based on
scientific approach that helps management
scientific method.
to make better decisions.
It is also referred to as operations research, quantitative
methods, quantitative analysis, and decision sciences.

The Management Science Approach to Problem Solving and Decision Making

Problem Solving is Decision

the identification of Making refers to
the difference the first five
between the desired steps of the
and actual results problem solving
and taking actions process.
to resolve the
differences.

1
Management Science 2nd Semester SY. 2020-2021

QUANTITATIVE ANALYSIS AND DECISION MAKING

Qualitative
Analysis is based
on judgement and
expereince

Quantitative
Analysis is based
on facts and data
associated with the
problem

Reasons why a quantitative approach shall be used in the decision-making process are as follows:
1. A complex problem where no good solution can be developed without quantitative analysis,
2. An especially important problem (great money is involved) requiring a thorough analysis before
making a decision,
3. The problem is new and the manager has no previous experience from which to base a decision,
4. A repetitive problem and time and effort can be saved by using quantitative procedures to make
routine recommendations to be used in decision-making.

QUANTITATIVE ANALYSIS
Management Scientist is a person skilled
Quantitative analysis begins once the problem has been
in the application of management science
structured. That is, when the problem has been defined,
techniques.
alternatives where defined, and the criteria were already
determined.

The management scientist and the user of them results must work closely together in structuring the
problem in order to generate the best results. Once the problem has been structured, the next step, is to
develop a mathematical model that will represent the problem situation.
2
Management Science 2nd Semester SY. 2020-2021

Model Development
Models are representations of real objects or situations which enable users to make inferences about the
reality by through study and analysis.
Quantitative analysis deals with mathematical models which A model is an abstract mathematical
uses symbols and mathematical relationships or expressions representation of a problem situation.
to represent a problem.

Example:
The profit from a sale of a product can be computed by multiplying the profit per unit by the quantity of units
sold.
If we let x represent the number of units sold and
P represent the total profit, with
Profit of Php10.00 per unit,
the model for the problem is as follows:

𝑷 = 10x

The problem definition phase of the mathematical modeling

Objective function refers to the
process involves defining the objective (maximization of profits or
mathematical expression that describes
minimization of cost) while considering the restrictions or
the problem’s objective.
constraints such as limited production capacities.
The objective and constraints must be accurately expressed in terms of mathematical equations or
relationships in order to attain the objectives of using the quantitative approach in decision-making.
Example: Based on the previous example, a firm attempting to maximize profit but subject to restrictions
of requiring 5 hours to produce each unit but only have 40 hours of weekly production time would result to
the following mathematical expressions:

Objective Function P = 10x

Constraints 5x ≤ 40
The decision problem or question is the following: How many units of the product should be scheduled
each week to maximize profit?
A complete mathematical model for this production problem is

Maximize P = 10x objective function

subject to (s.t.) 5x ≤ 40
constraints
x≥0

3
Management Science 2nd Semester SY. 2020-2021

The x ≥ 0 constraint requires the production quantity x to be greater than or equal to zero, which simply
recognizes the fact that it is not possible to manufacture a negative number of units.
The optimal solution to this model can be easily calculated and is given by x =8, with an associated profit of
Php80.00

Uncontrollable inputs are In the sample mathematical model, the profit per unit (Php10.00), the
environmental factors that are production time per unit (5 hours), and the production capacity (40
not under the control of the hours) are the uncontrollable inputs while the production quantity x is
manager or decision maker. the controllable input.

Controllable inputs are controlled or determined by the decision maker. They are also referred to as decision
variables because they represent the decision alternatives.

Presented below is a flowchart of the process of transforming inputs to outputs:

Data Preparation

Data refer to the values of the uncontrollable inputs to the model.

It is necessary to identify the uncontrollable inputs or data before analyzing the model and recommending
solutions to the problem.
Examples of uncontrollable inputs are:
1. Profit per unit,
2. Production time per unit,
3. Production capacity

The management scientist or quantitative analyst may combine model development and data preparation
into one step if the model is small and there are only a few uncontrollable input values or data.
In reality, the data are not readily available and the analyst may need to coordinate with various
departments such as accounting, production, or operations department. In these situations, the

4
Management Science 2nd Semester SY. 2020-2021

management scientist may adopt a general notation for model development rather than immediately
attempt to gather the data.

Using the general notation: The following general model will then result from
the model development step:
𝑐 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Max cx
𝑎 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑖𝑛 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
s.t. ax ≤ b
𝑏 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑖𝑛 ℎ𝑜𝑢𝑟𝑠 x≥0

A separate data preparation step to identify the values for c, a, and b would then be necessary to complete
the model.

Model Solution
This step involves the identification of the values of the decision
Optimal Solution is the value or
variables that provide the best output for the model which is referred to
values that provide the best output.
as the optimal solution.
In the given example, this step involves finding the value of the quantity decision variable x that maximizes
profit without violating the given constraints of production hours and production capacity.
A trial-and-error may be conducted by testing and evaluating various decision alternatives. This can be
done by using different values for x and checking the projected profit and satisfaction of the given
constraints.

The decision alternative is considered

infeasible if it does not satisfy one or
more of the model constraints.

The decision alternative is feasible and

a candidate for the recommended
decision if it satisfies all the model
constraints.

Based on the above table, a production quantity of 8 is recommended because the feasible solution with
the highest projected profit occurs at x = 8.

Disadvantages of the trial-and-error approach:

1. not necessarily providing the best solution,
2. being inefficient in terms of requiring numerous calculations if many decision alternatives are tried

5
Management Science 2nd Semester SY. 2020-2021

Mathematical models are developed to answer the limitations brought by the trial-and-error approach.

Report Generation
One of the inputs that managers consider when making a decision is based on the quantitative analysis of
the problem. The model’s solution serves as basis in the preparation of managerial reports which includes
the recommended decision and other relevant information.

MODELS OF COST, REVENUE, AND PROFIT

Cost, revenue, and profit models can be helpful in financial planning, production planning, establishing
sales quotas and other decision-making areas.

Cost and Volume Models

Cost

Fixed Cost Variable Cost

this cost remains the this cost is dependent on
same no matter how and varies per production
much is produced volume

Example:
CSU Natives produces storage boxes from native and recycled materials. CSU’s best-selling product is one
made from rattan materials. Several products are produced on the same manufacturing line, and a setup
cost is incurred each time a changeover is made for a new product.
Suppose that the set-up cost for the rattan box is Php5, 000.00. This set-up cost is a fixed cost since it is
does not depend on the number of production. Assuming that the variable labor and materials cost are
P100.00 per unit produced, the cost-volume model for producing x units of the storage boxes can be
written as:

𝑪(𝒙) = 5,000 +100x where: x = production number in units

C(x) = total cost of producing units

6
Management Science 2nd Semester SY. 2020-2021

Once a production volume is established, the model equation above can be used to compute for the total
production cost.

Example:
In the given example, the total cost to produce a goal of 100.00 units is computed as:
𝑪(𝒙) = 5,000 +100x
𝑪 (1,200) = 5,000 + 100 (100)
𝑪 = 𝟏𝟓, 𝟎𝟎𝟎. 𝟎𝟎

Marginal cost rate of change of the total cost with In the given example, the marginal cost is P100.00
respect to production volume. It is the cost since the total cost will increase by P100.00 for
increase associated with a one-unit increase in the every unit increase in the production volume.
production volume.

Revenue and Volume Models

The model of relationship between revenue and volume can also be computed by CSU Natives to develop
a revenue projection based on a specified number of units.

Example:
Assuming that the selling price for every storage box is P300.00, the model for total revenue is:
𝑹(𝒙) = 300x where: x = sales volume in units
R(x) = total revenue with selling x units

Marginal revenue is the rate of change of total revenue with respect to sales volume. It is the increase in
total revenue resulting from a one-unit increase in sales volume.

In the case of CSU Natives, the marginal revenue is P300.00.

The marginal revenue is constant regardless of the sales volume in this case, but it may increase or
decrease as the volume x increases depending on the complexity of the model.

Profit and Volume Models

Marginal revenue is the rate of change of total revenue with respect to sales volume. It is the increase in
total revenue resulting from a one-unit increase in sales volume.

The effect of management decision to profits is one of the most important criteria in decision making.
Assuming that production is only limited to what can be sold, the production volume and sales volume will
be equal.

7
Management Science 2nd Semester SY. 2020-2021

A profit-volume model which is a combination of the previous two equations can be developed that will
determine the total profit associated with a specified production-sales volume.
Total profit P(x), is the total revenue minus total cost; and represented by
P(x) = R(x) - C(x)
the following model provides the total profit associated with producing and
selling x units: = 300x – (5,000 +100x)
= -5000 + 200x

Breakeven Analysis
Using the profit-volume model, total profit associated with any production volume x can now be determined.
Expected sales from 20 units will
Example:
result to a loss of P1, 000.00 which
A demand forecast of 20 units will result in a projected profit of: may prompt the manager to cancel
the production.
P(20) = -5,000 + 200(20) = -1000.00

Example:
Expected sales of 50 units will result
A demand forecast of 50 units will result in a projected profit of:
to a profit of P5, 000.00
P(50) = -5,000 + 200(50) = 5,000.00

Break-even point is the volume that results in zero profit because total revenue equals total cost. It
provides valuable information for a manager who must make a yes/no decision concerning production.

The breakeven point can be found by setting the total profit expression equal to zero and solving for the
production volume. Sales above the break-even point will result to a profit and below it will result to a loss.

P(x) = -5,000 + 200x

0 = -5,000 + 200x
5,000 = 200x
X = 25 units

MANAGEMENT SCIENCE TECHNIQUES

 Linear Programming - is a problem-solving approach developed for situations involving
maximizing or minimizing a linear function subject to linear constraints that limit the degree
to which the objective can be pursued.
 Integer Linear Programming - is an approach used for problems that can be set up as
linear programs, with the additional requirement that some or all of the decision variables
be integer values.
 Distribution and Network Models - A network is a graphical description of a problem
consisting of circles called nodes that are interconnected by lines called arcs. Specialized

8
Management Science 2nd Semester SY. 2020-2021

solution procedures exist for these types of problems, enabling us to quickly solve problems
in such areas as transportation system design, information system design, and project
scheduling.
 Nonlinear Programming – many business processes behave in a nonlinear manner. For
example, the price of a bond is a nonlinear function of interest rates; the quantity demanded
for a product is usually a nonlinear function of the price.
- Is a technique that allows for maximizing or minimizing a nonlinear function subject to
nonlinear constraints.
 Project Scheduling: PERT/CPM - In many situations, managers are responsible for
planning, scheduling, and controlling projects that consist of numerous separate jobs or
tasks performed by a variety of departments, individuals, and so forth
- help managers carry out their project scheduling responsibilities
 Inventory Models - are used by managers faced with the dual problems of maintaining
sufficient inventories to meet demand for goods and, at the same time, incurring the lowest
possible inventory holding costs.
 Waiting-Line or Queueing Models -help managers understand and make better decisions
concerning the operation of systems involving waiting lines.
 Simulation - is a technique used to model the operation of a system. This technique
employs a computer program to model the operation and perform simulation computations.
 Decision Analysis - can be used to determine optimal strategies in situations involving
several decision alternatives and an uncertain or risk-filled pattern of events.
 Goal Programming - a technique for solving multicriteria decision problems, usually within
the framework of linear programming.
 Analytic Hierarchy Process - This multicriteria decision-making technique permits the
inclusion of subjective factors in arriving at a recommended decision.
 Forecasting - are techniques that can be used to predict future aspects of a business
operation.
 Markov Process Models - are useful in studying the evolution of certain systems over
repeated trials. For example, Markov processes have been used to describe the probability
that a machine, functioning in one period, will function or break down in another period.