If inaccuracies or potential shortcomings inherent in the model are identified, take

corrective action such as :-

* Collection of more-accurate input data
* Modification of the model

4. Report Generation
- Based on the results of the model, a managerial report should be prepared. This report
should be easily understood by the decision maker.

- Also, the report should include:

* The recommended decision .

* Other relevant information about the results . ( For Ex:- how sensitive the model solution is
to the assumptions and data used in the model )

Implementation and Follow-Up

- The manager is responsible for combining the quantitative solution with qualitative
considerations in order to make the best possible decision. After completing the decision
making process, the manager must oversee the implementation and follow-up evaluation of
the model.

-At times, this process may lead to requests for model expansion or refinement that will cause
the analyst to return to an earlier steps in the quantitative analysis process.

- Successful implementation of model results is of critical importance, because if the results

of the quantitative analysis are not correctly implemented, the entire effort may be of no
value.

- One of the most effective ways to ensure successful implementation is to include users
throughout the modeling process

Example: Austin Auto Auction

An auctioneer has developed a simple mathematical model for deciding the starting bid he
will require when auctioning a used automobile. Essentially, he sets the starting bid at
seventy percent of what he predicts the final winning bid will (or should) be. He predicts the
winning bid by starting with the car's original selling price and making two deductions, one
based on the car's age and the other based on the car's mileage. The age deduction is $800
per year and the mileage deduction is $.025 per mile.

Q :- Develop the mathematical model that will give the starting bid (B ) for a car in terms of
the car's original price (P ), current age (A) and mileage (M ).

A :- The expected winning bid can be expressed as:

P - 800(A) - .025(M )
The entire model is:
B = .7(expected winning bid)
B = .7(P - 800(A) - .025(M ))
B = .7(P )- 560(A) - .0175(M )
.
Q :- Suppose a four-year old car with 60,000 miles on the odometer is being auctioned. If its
original price was $12,500, what starting bid should the auctioneer require?

A :- B = .7(12,500) - 560(4) - .0175(60,000) = $5,460

Q :- The model is based on what assumptions?

A :- The model assumes that the only factors influencing the value of a used car are the
original price, age, and mileage (not condition, rarity, or other factors).

Also, it is assumed that age and mileage devalue a car in a linear manner and without limit.
(Note, the starting bid for a very old car might be negative!).

..

Example: Iron Works, Inc.

Iron Works, Inc. manufactures two products made from steel and just received this month's
allocation of b pounds of steel. It takes a1 pounds of steel to make a unit of product 1 and a2
pounds of steel to make a unit of product 2. Let x1 and x2 denote this month's production
level of product 1 and product 2, respectively. Denote by p1 and p2 the unit profits for
products 1 and 2, respectively. Iron Works has a contract calling for at least m units of product
1 this month. The firm's facilities are such that at most u units of product 2 may be produced
monthly.

..

Mathematical Model

The total monthly profit =

(profit per unit of product 1) x (monthly production of product 1) + (profit per unit of product
2) x (monthly production of product 2) = p1x1 + p2x2

We want to maximize total monthly profit: Max p1x1 + p2x2



The total amount of steel used during monthly production equals:

(steel required per unit of product 1) x (monthly production of product 1) + (steel required
per unit of product 2) x (monthly production of product 2) = a1x1 + a2x2

This quantity must be less than or equal to the allocated b pounds of steel: a1x1 + a2x2 < b

The monthly production level of product 1 must be greater than or equal to m :

x1 > m
The monthly production level of product 2 must be less than or equal to u :
x2 < u
However, the production level for product 2 cannot be negative:
x2 > 0

..

Mathematical Model Summary

Max p1x1 + p2x2
s.t. a1x1 + a2x2 < b
x1 > m
x2 < u
x2 > 0

Q :- Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720, p1 = 100, p2 = 200. Rewrite the

model with these specific values for the uncontrollable inputs.

A :- Substituting, the model is:

Max 100x1 + 200x2
s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0

Q :- The optimal solution to the current model is x1 = 60 and x2 = 626 2/3. If the product
were engines, explain why this is not a true optimal solution for the "real-life" problem.

A :- One cannot produce and sell 2/3 of an engine. Thus the problem is further restricted by
the fact that both x1 and x2 must be integers. (They could remain fractions if it is assumed
these fractions are work in progress to be completed the next month.)

.
Models of Cost, Revenue and Profit
- Models that are involving the relationship between volume variable and cost, revenue and
profit.
- Through the use of these models, a manager can determine the projected cost, revenue and
profit associated with specific production quantity or sales volume.

A. Cost and Volume Models

The Cost of manufacturing or producing a product is a function of the volume produced.

Fixed
This Cost can be divided into two types Cost
Variable
* Fixed Cost :- is the portion of the total cost that doesnt depend on the production volume,
this cost remains the same no matter how much is produced.
* Variable Cost :- is the portion of the total cost that depend on and varies with the
production volume.
For Example : If the fixed cost for a certain product is $ 3000 and the variable cost per unit is
$ 2 so the total cost function will be :- Total Cost or C ( x ) = 3000 + 2x , in which ( x ) is
the number of units.
* Marginal Cost :- the rate of change of the total cost with respect to production volume.
That is, it is the cost increase associated with a one-unit increase in the production volume.

B. Revenue and volume models

A model of the relationship between revenue and production volume.
According to the previous example : If the unit selling price for this product is $5 per unit
so the total revenue model will be : Total Revenue or R ( x ) = 5 x , in which ( x ) is sales
volume in units.
* Marginal Revenue :- the rate of change of total revenue with respect to sales volume.
That is, it is it is the increase in total revenue resulting from one-unit increase in sales volume.

C. Profit and volume models

One of the most important criteria for management decision making is profit. Managers need
to be able to know the profit implications of their decisions.
According to the previous example : If we assume that we will only produce what can be sold,
the production volume and sales volume will be equal.
Total Profit = Total Revenue ( - ) Total Cost .. OR .. P ( x ) = R ( x ) - C ( x )
So, P ( x ) = 5x - ( 3000 + 2x ) = - 3000 +3x
Thus, The profit- volume model can be derived from the revenue-volume and cost-volume
models.
..

Breakeven Analysis
By using the previous equation, we can determine the total profit associated with any
production volume of X units.
* Breakeven Point :- The volume that results in total revenue equaling total cost with profit
equal to zero.

- If the breakeven point is known, a manager can quickly conclude that a volume above the
breakeven point will result in a profit, while a volume below the breakeven point will result in
a loss.

So, how to compute the breakeven point ?

Considering the above equation of : P ( x ) = - 3000 + 3x , we will set this expression to be
equal to zero so, it will be : P ( x ) = - 3000 + 3x = 0 and solve for finding X ? Answer : 3 x =
3000 , So X = 1000
Management Science Techniques
* Linear Programming : Linear programming is a problem-solving approach
developed for situations involving maximizing or minimizing a linear function subject to linear
constraints that limit the degree to which the objective can be pursued.

* Integer Linear Programming : Integer linear programming is an approach used

for problems that can be set up as linear programs, with the additional requirement that some
or all of the decision variables be integer values.

* Network Models : A network is a graphical description of a problem consisting of

circles called nodes that are interconnected by lines called arcs. Specialized solution
procedures exist for these types of problems, enabling us to quickly solve problems in such
areas as transportation system design, information system design, and project scheduling.

* Project Scheduling: PERT/CPM : In many situations, managers are responsible

for planning, scheduling, and controlling projects that consist of numerous separate jobs or
tasks performed by a variety of departments, individuals, and so forth. The PERT (Program
Evaluation and Review Technique) and CPM (Critical Path Method) techniques help managers
carry out their project scheduling responsibilities.

* Inventory Models : Inventory models are used by managers faced with the dual
problems of maintaining sufficient inventories to meet demand for goods and, at the same
time, incurring the lowest possible inventory holding costs.
* Simulation : Simulation is a technique used to model the operation of a system. This
technique employs a computer program to model the operation and perform simulation
computations.

* Decision Analysis : Decision analysis can be used to determine optimal strategies in

situations involving several decision alternatives and an uncertain or risk-filled pattern of
events.

*Goal Programming : Goal programming is a technique for solving multi-criteria

decision problems, usually within the framework of linear programming.

* Analytic Hierarchy Process : This multi-criteria decision-making technique

permits the inclusion of subjective factors in arriving at a recommended decision.

* Forecasting : Forecasting methods are techniques that can be used to predict future
aspects of a business operation.

* Markov Process Models : Markov process models are useful in studying the
evolution of certain systems over repeated trials.

* Dynamic Programming : Dynamic programming is an approach that allows us to

break up a large problem in such fashion that once all the smaller problems have been solved,
we are left with an optimal solution to the large problem.