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# Chapter 1:

Introduction to Managerial
Decision Modeling

What is Decision Modeling?
A scientific approach to managerial
decision making

## • The development of a (mathematical) model

of a real-world scenario

## • The model provides insight into the solution of

the managerial problem
Types of Decision Models
• Deterministic Models
Where all the input data value are known with
complete certainty

• Probabilistic Models
Where some input data values are uncertain
Quantitative vs. Qualitative Data
The modeling process begins with data

• Quantitative Data
Numerical factors such as costs and revenues

• Qualitative Data
Factors that effect the environment which are
difficult to quantify
• Computers are used to create and solve
models

## • Spreadsheets are a convenient alternative

to specialized software

## • Microsoft Excel has extensive modeling

Steps in Decision Modeling
1. Formulation
Translating a problem scenario from
words to a mathematical model
2. Solution
Solving the model to obtain the optimal
solution
3. Interpretation and Sensitivity Analysis
Analyzing results and implementing a
solution
Steps in
Modeling
Example Model: Tax Computation
Self employed couple must estimate and
pay quarterly income tax (joint return)
• Income amount is uncertain
• 5% of income to retirement account, up to
\$4000 max
• Personal exemption = 2 x \$3200 = \$6400
• Standard deduction = \$10,000
• No other deductions
Tax Brackets

Percent of
Taxable Income Taxable Income
up to \$14,600 10%
\$14,601 to \$59,400 15%
\$59,401 to \$119,950 25%
Example Model: Break-Even Analysis

## Costs = (Fixed cost) +

(Cost per unit) x (Num. units)
The Break Even Point (BEP) is the
number of units where;

Profit = 0, so
Revenue = Costs

## BEP = Fixed cost

(Selling price) – (Cost per unit)
Possible Problems in
Developing Decision Models
Defining the Problem

• Conflicting viewpoints

## • Impact on other departments

• Beginning assumptions

• Solution outdated
Possible Problems in
Developing Decision Models
Developing a Model
• Fitting the textbook models
• Understanding the model

## Acquiring Input Data

• Using accounting data

• Validity of data
Possible Problems in
Developing Decision Models
Developing a Solution
• Hard to understand mathematics

Implementation