Introduction to

Modelling

Chapter 1

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Chapter Topics

The Management Science Approach to Problem

Solving

Model Building: Break-Even Analysis

Computer Solution

Management Science Modeling Techniques

Business Usage of Management Science

Techniques

Management Science Models in Decision

Support Systems

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The Management Science

Approach

Management science is a scientific approach

to solving management problems.

It is used in a variety of organizations to solve

many different types of problems.

It encompasses a logical mathematical

approach to problem solving.

Management science, also known as

operations research, quantitative methods,
etc., involves a philosophy of problem solving
in a logical manner.

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The Management Science

Process

Figure 1.1 The management science

process
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2013 Pearson Education

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Steps in the Management

Science Process
Observation - Identification of a problem that exists
(or may occur soon) in a system or organization.
Definition of the Problem - problem must be
clearly and consistently defined, showing its
boundaries and interactions with the objectives of the
organization.
Model Construction - Development of the functional
mathematical relationships that describe the decision
variables, objective function and constraints of the
problem.
Model Solution - Models solved using management
science techniques.
Copyright
Model
Implementation
- Actual use of the model or
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Example of Model
Construction (1 of 3)
Information and Data:
Business firm makes and sells a steel
product
Product costs $5 to produce
Product sells for $20
Product requires 4 pounds of steel to make
Firm has 100 pounds of steel
Business Problem:
Determine the number of units to produce
to make the most profit, given the limited
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Example of Model Construction

(2 of 3)
Variables: x = # units to produce (decision variable)
Z = total profit (in $)
Model:

Z = $20x - $5x (objective function)

4x = 100 lb of steel (resource constraint)

Parameters:

$20, $5, 4 lbs, 100 lbs (known values)

Formal Specification of Model:

maximize Z = $20x - $5x
subject to 4x = 100
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Example of Model Construction (3 o

Model Solution:
Solve the constraint equation:
4x = 100
(4x)/4 = (100)/4
x = 25 units
Substitute this value into the profit function:
Z = $20x - $5x
= (20)(25) (5)(25)
= $375
(Produce 25 units, to yield a profit of $375)
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Model Building:
Break-Even Analysis (1 of 9)
Used to determine the number of units of a
product to sell or produce that will equate
total revenue with total cost.
The volume at which total revenue equals
total cost is called the break-even point.
Profit at break-even point is zero.
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Model Building:
Break-Even Analysis (2 of 9)
Model Components
Fixed Cost (cf) - costs that remain constant
regardless of number of units produced.

Variable Cost (cv) - unit production cost of product.

Volume (v) the number of units produced or sold

Total variable cost (vcv) - function of volume (v)

and unit variable cost.

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Model Building:
Break-Even Analysis (3 of 9)
Model Components
Total Cost (TC) - total fixed cost plus total
variable cost.

TC c f vcv

Profit (Z) - difference between total

revenue vp (p Z
=
unit
total cost,
vp price)
- c f - vcand
v
i.e.

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Model Building:
Break-Even Analysis (4 of 9)
Computing the Break-Even Point
The break-even point is that volume at
which total revenue equals total cost and
profit is zero:
vp c vc 0
f

v( p cv ) c f
The break-even
point
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cf
p cv
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Model Building:
Break-Even Analysis (5 of 9)
Example: Western Clothing
Company
Fixed Costs:

cf =

$10000
Variable Costs: cv = $8
per pair
Price :

p=

$23 per pair

The
Break-Even
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Point is:
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Model Building:
Break-Even Analysis (6 of 9)

Figure 1.2 Break-even

model
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Model Building:
Break-Even Analysis (7 of 9)

Figure 1.3 Break-even model with an

increase in price

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Model Building:
Break-Even Analysis (8 of 9)

Figure 1.4 Break-even model with an increase in

variable cost
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Model Building:
Break-Even Analysis (9 of 9)

Figure 1.5 Break-even model with a change

in fixed cost
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Break-Even Analysis: Excel

Solution (1 of 4)

Formula for v,
break-even point,
=D4/(D8-D6)

Exhibit 1.1
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Break-Even Analysis: Excel QM

Solution (2 of 4)
Click on
Add-Ins,
then the
menu of
Excel QM
modules

Exhibit 1.2

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Enter
model
parameter
s in cells
B10:B13
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Break-Even Analysis: Excel QM

Solution (3 of 4)

Exhibit 1.3 Western Clothing Company in

QM
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Break-Even Analysis: QM Solution (4

of 4)

Exhibit 1.4 QM break-even graph for Western

Clothing Company
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Classification of Management Science

Techniques

Figure 1.6 Classification of management science

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techniques

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Characteristics of Modeling
Techniques
Linear Mathematical Programming clear objective; restrictions on resources
and requirements; parameters known with
certainty. (Chap 2-6, 9)
Probabilistic Techniques - results contain
uncertainty. (Chap 11-13)
Network Techniques - model often
formulated as diagram; deterministic or
probabilistic. (Chap 7-8)
Other Techniques - variety of deterministic
and probabilistic methods for specific types
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of problems
including
forecasting, inventory,

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Business Usage of Management

Science

Some application areas:

- Project Planning
- Capital Budgeting
- Inventory Analysis
- Production Planning
- Scheduling

Interfaces - Applications journal published

by Institute for Operations Research and
Management Sciences (INFORMS)

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Management Science Models in

Decision Support Systems (DSS)
A decision support system is a computer-based
system that helps decision makers address complex
problems that cut across different parts of an
organization and operations.
Features of Decision Support Systems
Interactive
Uses databases & management science models
Address what if questions
Perform sensitivity analysis
Examples include:
ERP Enterprise Resource Planning
OLAP Online Analytical Processing
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Management Science Models

Decision Support Systems (2 of
2)

Figure 1.7 A decision

support
system
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval
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recording, or otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

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