Introduction To Management Science

Introduction to
Management Science
with Spreadsheets
Stevenson and Ozgur
First Edition
Part 1 Introduction to Management Science and Forecasting
Chapter 1
Introduction to Management
Science, Modeling, and
Excel Spreadsheets
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
After completing this chapter, you should be able to:
Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–2
Learning Objectives (cont’d)
After completing this chapter, you should be able to:
The
The Importance
Importance of
of Management
Management Science
Science
• Management science
– The discipline of applying advanced analytical
methods to help make better decisions.
– Devoted to solving managerial-type problems using
quantitative models
• Applications of management science
– Forecasting, capital budgeting, portfolio analysis,
capacity planning, scheduling, marketing, inventory
management, project management, and production
planning.
Table
Table1–2
1–2 Successful
SuccessfulApplications
ApplicationsofofManagement
ManagementScience
Science
Table
Table1–2
1–2 Successful
SuccessfulApplications
ApplicationsofofManagement
ManagementScience
Science(cont’d)
(cont’d)
Problem
Problem Solving
Solving Approaches
Approaches
• Managers tend to use a • Managers tend to use a
qualitative approach to quantitative approach
problem solving when when
1. The problem is fairly 1. The problem is
simple. complex.
2. The problem is 2. The problem is not
familiar. familiar.
3. The costs involved 3. The costs involved
are not great. are substantial.
4. Enough time is
available to analyze
the problem.
Advantages
Advantages of
of the
the Quantitative
Quantitative Approach
Approach
• Directs attention to the essence of an analysis:
to solve a specific problem.
• Improves planning which helps prevent future
problems
• Results in more objective decisions than purely
qualitative analysis.
• Incorporates advances in computational
technologies to managerial problem-solving.
Models
Models
• A Model
– An abstraction of reality. It is a simplified, and often
idealized, representation of reality.
• Examples : an equation, an outline, a diagram, and a map
– By its very nature a model is incomplete.
– Provides an alternative to working with reality
• Symbolic models
– Use numbers and algebraic symbols
• Mathematical models
– Decision variables
– Uncontrollable variables
Deterministic
Deterministic versus
versus Probabilistic
Probabilistic Models
Models
• Deterministic models
– Used for problems in which information is known with
a high degree of certainty.
– Used to determine an optimal solution to the problem.
• Probabilistic models
– Used when it cannot be determined precisely what
values (requiring probabilities) will occur (usually in the
future).
Figure
Figure1–1
1–1 The
TheManagement
ManagementScience
ScienceApproach
Approach
Figure
Figure1–2
1–2 DSS
DSSFramework
Framework
Source: E. Turban, Jay Aronson, and Ting-Peng Liang, Decision Support Systems and Intelligence Systems, 7th ed. (Upper Saddle River, NJ: Prentice Hall, 2005), p. 109.
Exhibit
Exhibit1-1
1-1 Excel
ExcelSpreadsheet
Spreadsheet
Exhibit
Exhibit1-2
1-2 Functions
FunctionsScreen
Screen
Exhibit
Exhibit1–3
1–3 Add-in
Add-inOptions
Options
Breakeven
Breakeven Analysis
Analysis
• Breakeven analysis (cost-volume analysis)
– Is concerned with the interrelationship of costs,
volume (quantity of output or sales), and profit.
• The Break-Even Point (BEP)
– The volume for which total revenue and total cost are
equal.
– The dividing line between profit and loss; sales higher
than the break-even point will result in a profit, while
sales that is lower than the break-even point will result
in a loss.
– Where you get “out of the red.”
Breakeven
Breakeven Analysis
Analysis
• Breakeven analysis (cost-volume analysis)
– Is concerned with the interrelationship of costs, volume
(quantity of output or sales), and profit.
• Components of Break-Even Analysis
– Volume: the level of output of a machine, department,
or organization, or the quantity of sales.
– Revenue: the income generated by the sale of a
product. Total revenue = revenue per unit (selling price
per unit) multiplied by units (volume) sold.
– Costs: costs that must be taken into account
• Fixed costs are not related to the volume of output.
• Variable costs increase and decrease with output.
Assumptions
Assumptions of
of Break-Even
Break-Even Analysis
Analysis
• The revenue per unit is the same for all
volumes.
• The variable cost per unit is the same for all
volumes.
• Fixed cost is the same for all levels of volume.
• Only one product is involved.
• All output is sold.
• All relevant costs are accounted for, and
correctly assigned to either the fixed cost
category or the variable cost category.
Figure
Figure1–3
1–3 Total
TotalRevenue
RevenueIncreases
IncreasesLinearly
Linearlyas
asVolume
VolumeIncreases
Increases
Figure
Figure1–4
1–4 Fixed
FixedCosts
Costs
Figure
Figure1–5
1–5 Total
TotalVariable
VariableCost
Cost
Figure
Figure1–6
1–6 Total
TotalCost
Cost
Figure
Figure1–7
1–7 Profit
Profitand
andthe
theBreak-Even
Break-EvenPoint
Point
Profit
Example
Example11––11
Exhibit
Exhibit1–4
1–4 Break-Even
Break-EvenAnalysis
Analysis
Exhibit
Exhibit11–5
–5 Goal
GoalSeek
SeekInput
InputScreen
Screen
Exhibit
Exhibit11–6
–6 Goal
GoalSeek
SeekOutput
OutputScreen
Screen

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Introduction to

Part 1 Introduction to Management Science and Forecasting

After completing this chapter, you should be able to:

After completing this chapter, you should be able to:

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