Continuing Process in Organization.

Investment Decision

DECISION
MAKING
In all aspect of
business

Type Product
Facility
Resource, material
Distribution, logistic

Factor of Decision Support

limited
COST
optimal
Time

Resource

technology
priority

result of the decision-making is strongly influenced

by the skills of decision makers

Model for Decision Making

Abstraction of reality
physics

schematic

mathematics

Must to accommodate real conditions

Introduction To MODEL

Management Science
Prepared by: Renna Magdalena
~Lecturer of Accounting.Department~
~UPHS~

REQUIRED TEXT BOOK

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.

Observation
Observasi

Problem Definition
Definisi Masalah

Model Construction

FEEDBACK

Konstruksi Model

Solution
Solusi

Implementation
Pelaksanaan

Management
Science
Technique

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.

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)

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.

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.

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 = unit price) and total cost, i.e.

Z vp - c f - vcv

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
p cv

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

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

Figure 1.2

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

Figure 1.3

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

Figure 1.4

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

Figure 1.5

Break-Even Analysis: Excel Solution

(1 of 5)

Exhibit 1.1

Break-Even Analysis: Excel QM Solution

(2 of 5)

Exhibit 1.2

Break-Even Analysis: Excel QM Solution

(3 of 5)

Exhibit 1.3

Break-Even Analysis: QM Solution

(4 of 5)

Exhibit 1.4

Break-Even Analysis: QM Solution

(5 of 5)

Exhibit 1.5

Classification of Management Science Techniqu

Figure 1.6

Modeling Techniques

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)

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)

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

Management Science Models

Decision Support Systems (2 of 2)
Decision
Maker

Data
Bases

User
interface

Management
Science model

Internet
E-business

Figure 1.7A
Decision Support
System

Thank You!
All of my presentation can be downloaded at:
M4gd4l3n4.multiply.com

Questions?

I~am~happy~to~help~you

Renna Magdalena
Accounting Department
Business School Faculty~~UPHS

Consider a model in which two products, x and y, are produced.

There are 100 pounds of material and 80 hours of labor available. It
requires 2 pounds of material and 1 hour of labor to produce a unit
of x, and 4 pounds of material and 5 hours of labor to produce a unit
of y. The profit for x is $30 per unit, and the profit for y is $50 per
unit. If we want to know how many units of x and y to produce to
maximize profit, the model is

Determine the solution to this problem and

explain your answer.

The Easy Drive Car Rental Agency needs 500 new cars in its Nashville
operation and 300 new cars in Jacksonville, and it currently has 400
new cars in both Atlanta and Birmingham. It costs $30 to move a car
from Atlanta to Nashville, $70 to move a car from Atlanta to
Jacksonville, $40 to move a car from Birmingham to Nashville, and $60
to move a car from Birmingham to Jacksonville. The agency wants to
determine how many cars should be transported from the agencies in
Atlanta and Birmingham to the agencies in Nashville and Jacksonville in
order to meet demand while minimizing the transport costs. Develop a
mathematical model for this problem and use logic to determine a
solution.