Stevenson and Ozgur First Edition Introduction to Management Science with Spreadsheets Part 1...

Stevenson and OzgurFirst Edition

Stevenson and OzgurFirst Edition

Introduction to Management Science with Spreadsheets

Introduction to Management Science with Spreadsheets

Part 1 Introduction to Management Science and ForecastingPart 1 Introduction to Management Science and Forecasting

McGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights

reserved.

Chapter 1Chapter 1

Introduction to Management Introduction to Management Science, Modeling, and Science, Modeling, and Excel SpreadsheetsExcel Spreadsheets

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–2

Learning ObjectivesLearning 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:


Learning Objectives Learning Objectives (cont’d)(cont’d)

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:


The Importance of Management ScienceThe Importance of Management ScienceThe Importance of Management ScienceThe Importance of Management 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 1–2Table 1–2 Successful Applications of Management ScienceSuccessful Applications of Management ScienceTable 1–2Table 1–2 Successful Applications of Management ScienceSuccessful Applications of Management Science


Table 1–2 Table 1–2 Successful Applications of Management Science (cont’d)Successful Applications of Management Science (cont’d)Table 1–2 Table 1–2 Successful Applications of Management Science (cont’d)Successful Applications of Management Science (cont’d)


Problem Solving ApproachesProblem Solving ApproachesProblem Solving ApproachesProblem Solving Approaches

• Managers tend to use a qualitative approach to 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 a quantitative 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.


Advantages of the Quantitative ApproachAdvantages of the Quantitative ApproachAdvantages of the Quantitative ApproachAdvantages 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.


ModelsModelsModelsModels

• 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 versus Probabilistic ModelsDeterministic versus Probabilistic ModelsDeterministic versus Probabilistic ModelsDeterministic versus Probabilistic 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 1–1Figure 1–1 The Management Science ApproachThe Management Science ApproachFigure 1–1Figure 1–1 The Management Science ApproachThe Management Science Approach


Figure 1–2Figure 1–2 DSS FrameworkDSS FrameworkFigure 1–2Figure 1–2 DSS FrameworkDSS 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 1-1Exhibit 1-1 Excel SpreadsheetExcel SpreadsheetExhibit 1-1Exhibit 1-1 Excel SpreadsheetExcel Spreadsheet


Exhibit 1-2Exhibit 1-2 Functions ScreenFunctions ScreenExhibit 1-2Exhibit 1-2 Functions ScreenFunctions Screen


Exhibit 1–3Exhibit 1–3 Add-in OptionsAdd-in OptionsExhibit 1–3Exhibit 1–3 Add-in OptionsAdd-in Options


Breakeven AnalysisBreakeven AnalysisBreakeven AnalysisBreakeven 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 AnalysisBreakeven AnalysisBreakeven AnalysisBreakeven 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 of Break-Even AnalysisAssumptions of Break-Even AnalysisAssumptions of Break-Even AnalysisAssumptions of Break-Even 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 1–3Figure 1–3 Total Revenue Increases Linearly as Volume IncreasesTotal Revenue Increases Linearly as Volume IncreasesFigure 1–3Figure 1–3 Total Revenue Increases Linearly as Volume IncreasesTotal Revenue Increases Linearly as Volume Increases


Figure 1–4Figure 1–4 Fixed CostsFixed CostsFigure 1–4Figure 1–4 Fixed CostsFixed Costs


Figure 1–5Figure 1–5 Total Variable CostTotal Variable CostFigure 1–5Figure 1–5 Total Variable CostTotal Variable Cost


Figure 1–6Figure 1–6 Total CostTotal CostFigure 1–6Figure 1–6 Total CostTotal Cost


Figure 1–7Figure 1–7 Profit and the Break-Even PointProfit and the Break-Even PointFigure 1–7Figure 1–7 Profit and the Break-Even PointProfit and the Break-Even Point

Profit


Example 1Example 1––11Example 1Example 1––11


Exhibit 1–4Exhibit 1–4 Break-Even AnalysisBreak-Even AnalysisExhibit 1–4Exhibit 1–4 Break-Even AnalysisBreak-Even Analysis


Exhibit 1Exhibit 1–5–5 Goal Seek Input ScreenGoal Seek Input ScreenExhibit 1Exhibit 1–5–5 Goal Seek Input ScreenGoal Seek Input Screen

Exhibit 1Exhibit 1–6–6 Goal Seek Output ScreenGoal Seek Output ScreenExhibit 1Exhibit 1–6–6 Goal Seek Output ScreenGoal Seek Output Screen

Stevenson and Ozgur First Edition Introduction to Management Science with Spreadsheets Part 1...

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