BSA CORE 2

MANAGEMENT SCIENCE

MODULE 8
Tuesday

MODEL CONSTRUCTION AND SOLUTION

Cost-volume model
For example:
Fixed cost (FC) = $3,000
Variable cost (VC) = $2
Cost-volume model = FC + VC
Since FC = $3000 and VC = $2 per unit
Cost volume model for producing x units is
C(x) = 3000 + 2x
Where:
C(x) = total cost of producing x units
x = production volume in units
Suppose production volume (x) = 1,200 units
C(x) = 3000 + 2(1200) = $5,400
Interpretation: The total cost of producing 1,200 units of x is $5,400.

Source: Anderson and Sweeney. An Introduction to Management Science: Quantitative Approach Full
Description. https://www.yumpu.com/en/document/read/63935146/epub-download-an-introduction-
to-management-science-quantitative-approach-full-description
Revenue and volume model
Revenue = Price x Sales volume
Example: If a product sells at $5.00 per unit, the model total revenue model is
R(x) = 5(x)
where:
R(x) = total revenue associated with selling x units
x = sales volume in units
If x = 10 units
R(x) = 5(10) = $50
Interpretation: The total revenue for selling 10 units of x is $50
Profit and volume
Total profit (P) = total revenue (R) – total cost (C)
Profit and volume model: P(x) = R(x) – C(x)
where:
R = price x sales volume
C = FC + VC
where:
FC = fixed cost
VC = variable cost
Since
R(x) = 5x and
C(x) = 3000 + 2x,
Then
P(x) = 5x – (3000 + 2x)

Source: Anderson and Sweeney. An Introduction to Management Science: Quantitative Approach Full
Description. https://www.yumpu.com/en/document/read/63935146/epub-download-an-introduction-
to-management-science-quantitative-approach-full-description
 If x = 1200 units
P(x) = 5x – (3000 + 2x)
P(x) = 5(1200) – [3000 + 2(1200)]
= 6000 – (3000 + 2400)
= 6000 – 5400
P(x) = $600
Interpretation: The total profit at 1200 units is $600.

Source: Anderson and Sweeney. An Introduction to Management Science: Quantitative Approach Full
Description. https://www.yumpu.com/en/document/read/63935146/epub-download-an-introduction-
to-management-science-quantitative-approach-full-description