quantitative techniques chap01
TRANSCRIPT
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Stevenson and OzgurFirst Edition
Introduction to
Management Sciencewith Spreadsheets
Part 1 Introduction to Management Science and Forecasting
McGraw-Hill/Irwin Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1
Introduction to ManagementScience, Modeling, and
Excel Spreadsheets
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Learning Objectives
1. Describe the importance of management science.
2. Describe the advantages of a quantitative approach
to problem solving.
3. List some of the applications and use of
management science models.
4. Discuss the types of models most useful in
management science.5. Demonstrate the basic building blocks and
components of Excel.
After completing this chapter, you should be able to:
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Learning Objectives (contd)
6. Describe the basic nature and usefulness of break-
even analysis.
7. List and briefly explain each of the components of
break-even analysis.
8. Solve typical break-even problems manually and
with Excel.
After completing this chapter, you should be able to:
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The Importance of Management Science
Management scienceThe discipline of applying advanced analytical
methods to help make better decisions.
Devoted to solving managerial-type problems using
quantitative modelsApplications of management science
Forecasting, capital budgeting, portfolio analysis,
capacity planning, scheduling, marketing, inventory
management, project management, and productionplanning.
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Table 12 Successful Applications of Management Science
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Table 12 Successful Applications of Management Science (contd)
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Problem Solving Approaches
Managers tend to use aqualitative approachto
problem solving when
1.The problem is fairly
simple.
2.The problem is
familiar.
3.The costs involved
are not great.
Managers tend to use aquantitative approach
when
1.The problem is
complex.
2.The problem is not
familiar.
3.The costs involved
are substantial.
4.Enough time is
available to analyze
the problem.
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Advantages of the Quantitative 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.
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Models
A ModelAn 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
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Deterministic versus Probabilistic Models
Deterministic modelsUsed for problems in which information is known with
a high degree of certainty.
Used to determine an optimal solution to the problem.
Probabilistic modelsUsed when it cannot be determined precisely what
values (requiring probabilities) will occur (usually in
the future).
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Figure 11 The Management Science Approach
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Figure 12 DSS 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.
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Exhibit 1-1 Excel Spreadsheet
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Exhibit 1-2 Functions Screen
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Exhibit 13 Add-in Options
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Breakeven 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 areequal.
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 resultin a loss.
Where you get out of the red.
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Breakeven 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.
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Assumptions of Break-Even Analysis
The revenue per unit is the same for allvolumes.
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, andcorrectly assigned to either the fixed cost
category or the variable cost category.
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Figure 13 Total Revenue Increases Linearly as Volume Increases
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Figure 14 Fixed Costs
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Figure 15 Total Variable Cost
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Figure 16 Total Cost
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Figure 17 Profit and the Break-Even Point
Profit
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Example 11
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Exhibit 14 Break-Even Analysis
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Exhibit 15 Goal Seek Input Screen
Exhibit 16 Goal Seek Output Screen