Mtid 321 W1

Introduction to
Managerial Decision Modeling
15/01/2014 1
© 2013 Pearson Education, Inc. publishing as Prentice Hall
 Scientific approach to managerial decision making
 Often mathematical
 Model real-world scenarios
 Provide insights into solutions
 Used by Boeing, Mercedes-Benz, other aerospace and
automotive companies.
15/01/2014 MTID 321 : Shop Floor Management & Continuous Improvement Pearson Custom Publishing 2
 Deterministic Models
• Where all the input data value are known with complete certainty
• All the information needed for modeling a decision-making
problem environment is available, with fixed and known values
 Probabilistic Models
• Where some input data values are not known with certainty.
• Values of some important variables will not be known before
decisions are made
• They provide a structured approach for managers to incorporate
uncertainty into their models and to evaluate decisions under
alternate expectations regarding this uncertainty.
 Any decision modeling process starts with data
 Data are manipulated or processed into information that is
valuable to people making decisions.
• Quantitative Data
o Numerical factors such as costs and revenues
o Rates of return, financial ratios, and cash flows in our decision model
to guide our ultimate decision
• Qualitative Data
o Factors that affect the environment which are difficult to quantify
o Example: pending state and federal legislation, new technological
breakthroughs, and the outcome of an upcoming election
 Computers are used to create and solve models
 Excel Spreadsheets are a convenient alternative to

specialized software
 The use of some of Excel’s built-in functions and

procedures (e.g., Goal Seek, Data Table, and Chart
Wizard)
 Microsoft Excel has extensive modeling capability via

the use “add-ins”, such as the Data Analysis and Solver
1. Formulation
• Aspects translated and expressed
as a mathematical model
2. Solution
• Finding the optimal solution
3. Interpretation and Sensitivity

Analysis
• How the manager uses the results
1. Formulation
 Translating a problem scenario from words to a mathematical model.
 The most important and challenging step in decision modeling
 Poorly formulated problem will almost surely be wrong.
 The aim in formulation is to ensure that the mathematical model
completely addresses all the issues relevant to the problem at hand.
Classification of Formulation
 Defining the problem - to develop a clear, concise statement of the
problem
 Developing the model - developed models are mathematical.
A mathematical model is a set of mathematical relationships.
 Acquiring input data - obtain the input data to be used in the model,
improper data will result in misleading results. This situation is
called garbage in, garbage out (GIGO)
2. Solution
 Solving the model to obtain the optimal solution
Classification of Solution
 Developing a solution - involves manipulating the model to arrive at
the best (or optimal) solution to the problem. In some cases, this
may require that a set of mathematical expressions be solved to
determine the best decision.
 Testing the solution - Before a solution can be analyzed and

implemented, it must be tested completely. There are several ways
to test input data. One is to collect additional data from a different
source and use statistical tests to compare these new data with the
original data.
3. Interpretation and Sensitivity Analysis
 Analyzing results and implementing a solution
Classification of Sensitivity Analysis

 Analyzing the results and Sensitivity Analysis - starts with
determining the implications of the solution. Sensitivity analysis is
used to determine how much the solution will change if there are
changes in the model or the input data
 Implementing the results - after the solution has been implemented,

it should be closely monitored. Over time, there may be numerous
changes that call for modifications of the original solution, such as
changing economy, fluctuating demand, and model enhancements
 Defining the Problem
• Conflicting viewpoints
• Impact on other departments
• Beginning assumptions
• Solutions outdated
 Developing a Model
• Fitting the textbook model
• Understanding the model
 Acquiring Input Data
• Using accounting data
• Validity of data
 Developing a Solution
• Hard-to-understand mathematics
• Limitation of only one answer
 Testing the Solution
 Analyzing the Results
 Implementation
Sue and Robert, a newly married couple. Both are independent
contractors (Sue-decorator, Rob-painter). Their earnings are not
taxed at the source; therefore, they have to pay estimated income
taxes on a quarterly basis, based on their estimated taxable
income for the year. To help calculate this tax, they would like
to set a spreadsheet-based decision model. Assume that they have
following information available:
Income amount is uncertain
 5% of income to retirement account, up to $6000 max
 Personal exemption = 2 x $3700 = $7400
 Standard deduction for married couple = $11,600 free from any taxes
 No other deductions
 Tax Brackets:
Taxable Income Percent of Taxable Income
up to $17,000 10%
$17,001 to $69,001 15%
$69,001 to $139,350 25%
Screenshot 1-1A
Screenshot 1-1B
Profit = Revenue – Costs
Revenue = (Selling price) x (Num. units)
Costs = (Fixed cost) + (Cost per unit) x (Num. units)
The Break Even Point (BEP) is the number of units
where; Profit = 0, so
Revenue = Costs
BEP = Fixed cost

(Selling price) – (Cost per unit)
Bill Pritchett’s clock repair shop sells springs
for a unit price of $ 10. The fixed cost of the
equipment to build springs is $ 1,000. The
variable cost per unit is $ 5 for spring material
Screenshot 1-2A
Screenshot 1-2B
Screenshot 1-2C
Screenshot 1-2C
Problem 1-21
A manufacturer is evaluating options regarding his production
equipment. He is trying to decide whether he should refurbish his
old equipment for $70,000, make major modifications to the
production line for $135,000, or purchase new equipment for
$230,000. The product sells for $10, but the variable costs to
make the product are expected to vary widely, depending on the
decision that is to be made regarding the equipment. If the
manufacturer refurbishes, the variable costs will be $7.20 per
unit. If he modifies or purchases new equipment, the variable
costs are expected to be $5.25 and $4.75, respectively.
a) Which alternative should the manufacturer choose if it the
demand is expected to be between 30,000 and 40,000
units?
b) What will be the manufacturer’s profit if the demand is
38,000 units?

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Introduction to

Managerial Decision Modeling

 Excel Spreadsheets are a convenient alternative to

 The use of some of Excel’s built-in functions and

 Microsoft Excel has extensive modeling capability via

3. Interpretation and Sensitivity

 Testing the solution - Before a solution can be analyzed and

Classification of Sensitivity Analysis

 Implementing the results - after the solution has been implemented,

The Break Even Point (BEP) is the number of units

BEP = Fixed cost

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