Management Science

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 uses 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

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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.
 Model Implementation - Actual use of the model or its solution.

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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 amount of steel available.
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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 of 3)

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 = cf + vcv

 Profit (Z) - difference between total revenue vp (p = unit

price) and total cost, i.e.
Z  vp - c f - vcv

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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 f  vcv  0
v ( p  cv )  c f

The break-even point cf

v
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 Point is:

v = (10,000)/(23 -8)
= 666.7 pairs

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

Figure 1.2

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 Membangun Model: Analisis Impas (Break-Even Analysis)

Analisa Sensitivitas
Kemudian untuk mengembangkan hubungan yang umum dalam
menentukan volume impas, yang merupakan tujuan dari proses pemodelan ini.
Hubungan ini memungkinkan untuk melihat bagaimana tingkat keuntungan
(rugi) secara langsung dipengaruhi oleh perubahan volume. Namun, ketika kita
mengembangkan model ini, kita mengasumsikan bahwa parameter, biaya
tetap dan variabel dan harga, yang konstan. Pada kenyataannya parameter
seperti sering tidak pasti dan jarang dapat diasumsikan konstan, dan
perubahan dalam salah satu parameter yang dapat mempengaruhi solusi
model. Studi tentang perubahan pada model manajemen sains disebut analysis
sensitivitas, melihat seberapa sensitif model yang terjadi dalam perubahan.

Analisis sensitivitas dapat dilakukan pada semua model manajemen

sains dalam satu bentuk atau lain. Bahkan, kadang-kadang perusahaan
mengembangkan model untuk tujuan utama dari percobaan untuk melihat
bagaimana model akan bereaksi terhadap perubahan yang berbeda,
perusahaan memikirkan manajemen yang mungkin diharapkan terjadi di masa
depan. Sebagai perwujudan bagaimana analisis sensitivitas bekerja, kita akan
melihat efek dari beberapa perubahan pada impas model kami. 15
 Membangun Model: Analisis Impas (Break-Even Analysis)

Analisa Sensitivitas

Hal pertama yang dilakukan adalah menganalisis adalah harga. Sebagai

contoh, perusahaan akan meningkatkan harga untuk jins denim dari $ 23 menjadi $ 30.
Seperti yang diharapkan, ini meningkatkan total pendapatan, dan karena itu mengurangi
titik impas dari 666,7 pasang jeans menjadi 454,5 pasang jeans:

Secara umum, kenaikan harga menurunkan titik impas, semua hal lain tetap konstan

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

Figure 1.3

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 Membangun Model: Analisis Impas (Break-Even Analysis)

Analisa Sensitivitas

Ketika kita menaikkan harga, kami menyebutkan kemungkinan meningkatkan kualitas

produk untuk mengimbangi potensi kerugian dari penjualan karena kenaikan harga.
Misalnya, jahitan pada jeans denim diubah untuk membuat jeans lebih menarik dan kuat.
Perubahan ini mengakibatkan peningkatan biaya variabel sebesar $ 4 per celana jeans,
sehingga meningkatkan biaya variabel per unit, cv, menjadi $ 12 per pasang. Perubahan
(dalam hubungannya dengan perubahan harga kami sebelumnya menjadi $ 30) dan
menghasilkan volume impas baru:

Secara umum, peningkatan biaya variabel akan menurunkan titik impas, semua hal lain
tetap konstan.

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

Figure 1.4

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 Membangun Model: Analisis Impas (Break-Even Analysis)

Analisa Sensitivitas

Selanjutnya mari kita mempertimbangkan peningkatan pengeluaran iklan untuk

mengimbangi potensi kerugian dalam penjualan akibat kenaikan harga. Peningkatan
pengeluaran iklan adalah tambahan biaya tetap. Sebagai contoh, jika perusahaan
pakaian meningkatkan anggaran iklan bulanan sebesar $ 3.000, maka biaya tetap total,
cf, menjadi $ 13.000. Menggunakan biaya tetap, serta peningkatan biaya variabel per
unit sebesar $ 12 dan harga meningkat dari $ 30, kita menghitung volume impas sebagai
berikut:

Secara umum, peningkatan biaya tetap akan meningkatkan titik impas, semua hal lain
tetap konstan.
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 Model Building:
Break-Even Analysis (9 of 9)

Figure 1.5

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Break-Even Analysis: Excel Solution (1 of 5)

Exhibit 1.1
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Break-Even Analysis: Excel QM Solution (2 of 5)

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Exhibit 1.2 1-23
Break-Even Analysis: Excel QM Solution (3 of 5)

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Exhibit 1.3 1-24
Break-Even Analysis: QM Solution (4 of 5)

Exhibit 1.4
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Break-Even Analysis: QM Solution (5 of 5)

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Exhibit 1.5 1-26
Classification of Management Science Techniques

Figure 1.6 Modeling 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 of problems
including forecasting, inventory, simulation, multicriteria,
etc. (Chap 10, 14-16)
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Business Use 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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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
 Use 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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 Tugas

1.The Willow Furniture Company produces tables. The fixed monthly cost of production is $8,000, and
the variable cost per table is $65. The tables sell for $180 apiece.
a. For a monthly volume of 300 tables, determine the total cost, total revenue, and profit !
b. Determine the monthly break-even volume for the Willow Furniture Company !

2.The Retread Tire Company recaps tires. The fixed annual cost of the recapping operation is $60,000.
The variable cost of recapping a tire is $9. The company charges $25 to recap a tire.
a. For an annual volume of 12,000 tires, determine the total cost, total revenue, and profit !
b. Determine the annual break-even volume for the Retread Tire Company operation !

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