introduction and overview of

Management science
Management Science
 An approach to decision based on the scientific method, makes
extensive use of quantitative analysis
 other widely known and accepted names are operations research and
decision science

Problem Solving and Decision Making

Problem Solving
A. the process of identifying a difference between the actual and the
desired state of affairs and then taking action to resolve the difference
B. 7 Steps of Problem Solving Process
1. Identify and define the problem.
2. Determine the set of alternative solutions.
3. Determine the criterion or criteria that will be used to evaluate
the alternatives
4. Evaluate the alternatives.
5. Choose an alternative
6. Implement the selected alternative.
7. Evaluate the results to determine whether a satisfactory solution
has been obtained.

Decision Making
 first five steps of the problemsolving process.

Quantitative Analysis and Decision Making

Qualitative analysis
 Based primarily on the manager’s judgement and experience
 Includes the manager’s intuitive “feel” for the problem and is more an
art than science
 Skills in the qualitative approach are inherent in the manager and
usually increase with experience
 Quantitative Approach
 an analyst will concentrate on the quantitative facts or data
associated with the problem and develop mathematical
expressions that describe the objectives, constraints, and other
relationships that exist in the problem. Then, by using one or
more quantitative methods, the analyst will make a
recommendation based on the quantitative aspects of the
problem.

Quantitative Analysis
 Reasons why a quantitative approach may be used in the decision-
making process:
 The problem is complex, and the manager cannot develop a
good solution without the aid of quantitative analysis.
 The problem is especially important (e.g., a great deal of money
is involved), and the manager desires a thorough analysis
before attempting to make a decision.
 The problem is new, and the manager has no previous
experience from which to draw.
 The problem is repetitive, and the manager saves time and
effort by relying on quantitative procedures to make routine
decision recommendations.

A. Model Development
 Models
 Representations of real objects or situations and can be
presented in various forms
 Classification of models
 Iconic models
 Models that are physical replicas or scalar
representations of real objects
 Example: a child’s toy truck is a model of a real truck.
 Analog Models
 models that are physical in form but do not have the
same physical appearance as the object being
modelled.
 Example: The speedometer of an automobile is an
analog model because the position of the needle on
the dial represents the speed of the automobile.
 Mathematical models
 models that include representations of a problem by a
system of symbols and mathematical relationships or
expressions.
  Example: If we let X represent the number of units
sold and the total profit, then, with a profit of $10 per
unit, the following mathematical model defines the
total profit earned by selling x units: p = 10x.
 relate decision variables (controllable inputs) with fixed or variable
parameters (uncontrollable inputs).
 Decision variables or controllable inputs
 Inputs that are controlled or determined by the decision
maker
 Uncontrollable inputs
 environmental factors that are not under the control of the
manager or decision maker
 frequently seek to maximize or minimize some objective function
subject to constraints
 objective function
 a mathematical expression that describes the problem’s
objective
 Constraints
 Set of restrictions in the model
 Mathematical models are said to be stochastic or probabilistic if
any of the uncontrollable inputs is subject to variation, otherwise
are said to be deterministic.

B. Data Preparation
 Data
 Values of the uncontrollable inputs to the model
 All uncontrollable inputs or data must be specified before we can
analyze the model and recommend a decision or solution for the
problem.

C. Model Solution
 the analyst will attempt to identify the values of the decision
variables that provide the “best” output for the model
  One procedure that might be used in the model solution step
involves a trial-and-error approach in which the model is used to
test and evaluate various decision alternatives.
 If all constraints are satisfied, the decision alternative is feasible
and a candidate for the “best” solution or recommended decision.
 If a particular decision alternative does not satisfy one or more of
the model constraints, the decision alternative is rejected as being
infeasible.
 The specific decision-variable value or values providing the “best”
output will be referred to as the optimal solution for the model.

D. Report Generation
 A managerial report, that should be easily understood by the
decision maker, should be prepared.
 The report should include the following:
 The recommended decision
 Other pertinent information about the results

Models of Cost, Revenue, and Profit

A. Cost and volume models
 C(x) = cost + variable labor (production volume in units)
 C(x) = Total cost of producing x units

B. Revenue and volume models

 R(x) = cost (sales volume in units)
 R(x) = total revenue associated with selling x units

C. Profit and volume models

 P(x) = r(x) – C(x)

Management Science Techniques

1. Linear Programming
  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

2. Integer Linear Programming

 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

3. Distribution and 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.

4. Nonlinear programming
 a technique that allows for maximizing or minimizing a
nonlinear function subject to nonlinear constraints

5. Project scheduling: PERT/ cpm

 The PERT (Program Evaluation and Review Technique) and
CPM (Critical Path Method) techniques help managers carry
out their project scheduling responsibilities.

6. Inventory models
 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

7. Waiting-line or queuing models

  Developed to help managers understand and make better
decisions concerning the operation of systems involving
waiting lines

8. Simulation
 a technique used to model the operation of a system.
 employs a computer program to model the operation and
perform simulation computations

9. Decision analysis
 can be used to determine optimal strategies in situations
involving several decision alternatives and an uncertain or risk-
filled pattern of events

10. Goal programming

 a technique for solving multicriteria decision problems, usually
within the framework of linear programming

11. Analytic hierarchy process

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

introduction to
linear programming
Linear Equations and Inequalities
System of linear equations
 linear equation is any equation that can be written in the form ax + b
= 0 where a and b are real numbers and x is a variable
  the form is sometimes called the standard form of a linear equation
 linear equation is an equation for a straight line
 system of linear equation
 a group of two or more linear equations that involve more than
one variable
 the intersection of two linear equations when graphed is the
solution of this system. This system is known as independent
or consistent.

Solving Systems of Linear Equations in 2

Variables
 in an equation, there may be variables other than x and y
 can be solved in any of the methods:
 graphical solution
 Solving by elimination
 Solving by substitution

Inequalities
 Widely used in the study of operations research

Application of Linear Equations :

Models of Cost, Revenue and Profit
Cost Volume Profit (CVP)
 Examines the behavior of total revenues, total costs, and operating
income as changes occur in the output level, selling price, variable
costs per unit, or fixed costs
 Assumptions underlying the CVP analysis:
 Changes in the level of revenues and costs arise only because of
changes in the number of product (or service) units produced
and sold.
  Total costs can be divided into a fixed component and a
component that is variable with respect to the level of output.
 When graphed, the behavior of total revenues and total costs is
linear (straight-line) in relation to output units within the
relevant range.
 The unit selling price, unit variable costs, and fixed costs are
known and constant.
 The analysis either covers a single product or assumes that the
sales mix, when multiple products are sold, will remain
constant as the level of total units sold changes.
 All revenues and costs can be added and compared without
taking into account the time value of money.

The Concept of Costs

 Relationship between fixed costs and quantity

 Relationship between variable costs and quantity TVC = f (q)

3 Methods to calculate the breakeven point

A. Algebraic equation method
 Basic concepts and assumptions:
 Total cost (TC) = Total Fixed costs (TFC) + total
variable costs (TVC)
  Tvc = variable cost per unit (VCU) x Quantity Poduced
(Q)
 TOTAL REVENUE = selling price per unit (spu) x quantity
sold (q)
 Profit or operating income = total revenues from operations for
the accounting period – total costs from operations (excluding
income taxes):
 Profit = total revenues – total costs

B. Graphical method
 Construct a table for total revenue, total cost and profit
 Plot the values on a graph
 The point of intersection of the total revenue and total cost
curves is the breakeven point

C. Contribution margin method

 Contribution margin method
 CM is one of the key relationships in cvp analysis and is
the amount of revenue remaining after deducting variable
costs
 Contribution margin ratio
 Contribution-margin ratio= contribution margin per unit /
selling price
 Contribution margin ratio = total contribution margin /
total sales
 Contribution margin ratio = (sales price – variable cost
per unit) / sales price
 Weighted average cm ratio = sum of contribution of the
products / sum of sales of the products
 Break-even point contribution margin approach
 formulas are derived from the CVP analysis equation by
rearranging the equation and then replacing certain parts
with Contribution Margin formulas
 contribution approach formulas
 BEP in sales units
 TR = TVC + TFC
  SPU x Quantity = (VCU x quantity) + TFC
 Where:
 SPU = selling price per unit
 Q = number of units
 Vcu = variable cost per unit
 Fc = total fixed cost
 Break-even sales units = beq = fc / (spu – vcu)
 Where:
 Unit cm = spu – vcu
 Breakeven sales units = beq = fc / unit
cmki
 Bep in sales pesos
 Break-even Sales (TR) = Price per Unit × Break-
even Sales Units; or
 Break-even Sales (TR) = FC ÷ CM Ratio
 Contribution margin ratio = (sales price – variable
cost per unit) / sales price
 Contribution margin ratio = contribution margin
per unit / sales price

Linear Programming
Linear programming
 A problem-solving approach developed to help managers make
decisions
 Typical applications:
 A manufacturer wants to develop a production schedule and an
inventory policy that will satisfy sales demand in future
periods. Ideally, the schedule and policy will enable the
company to satisfy demand and at the same time minimize the
total production and inventory costs.
 A financial analyst must select an investment portfolio from a
variety of stock and bond investment alternatives. The analyst
would like to establish the portfolio that maximizes the return
on investment.
  A marketing manager wants to determine how best to allocate a
fixed advertising budget among alternative advertising media
such as radio, television, newspaper, and magazine. The
manager would like to determine the media mix that maximizes
advertising effectiveness.
 A company has warehouses in a number of locations
throughout the United States. For a set of customer demands,
the company would like to determine how much each
warehouse should ship to each customer so that total
transportation costs are minimized.

Maximization problem
 steps in solving linear programming problems
1. problem formulation
 process of translating a verbal statement of a problem
into a mathematical statement
 guidelines for problem / model formulation
a. understand the problem thoroughly
b. describe the objective
c. define the decision variables and write the
objective in terms of the decision variables
d. describe each constraint and write the constraints
in terms of the decision variables

2. Use the graphical solution procedure

 Use graphical method if the lp model is a 2-variable
model. Otherwise, use other techniques.
 Graphical solution procedure for maximization problems:
 Prepare a graph of the feasible solutions for each
of the constraints
 Determine the feasible region that satisfies all the
constraints simultaneously
 Draw an objective function line
  Move parallel objective function lines toward
larger objective function values without entirely
leaving the feasible region
 Any feasible solution on the objective function line
with the largest value is an optimal solution
Surplus variables
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