Lecture Introduction to Management Science with Spreadsheets: Chapter 1 - Stevenson, Ozgur

Chapter 1 Introduction to management science, modeling, and excel spreadsheets, after completing this chapter, you should be able to: Describe the importance of management science, describe the advantages of a quantitative approach to problem solving, list some of the applications and use of management science models, discuss the types of models most useful in management science, demonstrate the basic building blocks and components of Excel.

Introduction to Management Science with Spreadsheets Stevenson and Ozgur First Edition Part Introduction to Management Science and Forecasting Chapter 1 Introduction to Management  Science, Modeling, and  Excel Spreadsheets McGraw­Hill/Irwin Copyright © 2007 by The McGraw­Hill Companies, Inc. All rights reserved Learning Objectives After completing this chapter, you should be able to: Describe the importance of management science Describe the advantages of a quantitative approach to problem solving List some of the applications and use of management science models Discuss the types of models most useful in management science Demonstrate the basic building blocks and components of Excel Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–2 Learning Objectives (cont’d) After completing this chapter, you should be able to: Describe the basic nature and usefulness of breakeven analysis List and briefly explain each of the components of break-even analysis Solve typical break-even problems manually and with Excel Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–3 The The Importance Importance of of Management Management Science 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 Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–4 Table Table1–2 1–2 Successful SuccessfulApplications ApplicationsofofManagement ManagementScience Science Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–5 Table Table1–2 1–2 Successful SuccessfulApplications ApplicationsofofManagement ManagementScience Science(cont’d) (cont’d) Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–6 Problem Problem Solving Solving Approaches Approaches • Managers tend to use a qualitative approach to problem solving when The problem is fairly simple The problem is familiar The costs involved are not great • Managers tend to use a quantitative approach when The problem is complex The problem is not familiar The costs involved are substantial Enough time is available to analyze the problem Copyright © 2007 The McGraw­Hill  McGraw­ Companies. All rights reserved.   Hill/Irwin  1–7 Advantages Advantages of of the the Quantitative Quantitative Approach 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 Copyrightâ2007TheMcGrawưHill Companies.Allrightsreserved. McGrawư Hill/Irwin18 Models Models ã 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 Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–9 Deterministic Deterministic versus versus Probabilistic Probabilistic Models 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) Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–10 Figure Figure1–2 1–2 DSS DSSFramework Framework Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–12 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 Exhibit1-1 1-1 Excel ExcelSpreadsheet Spreadsheet Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–13 Exhibit Exhibit1-2 1-2 Functions FunctionsScreen Screen Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–14 Exhibit Exhibit1–3 1–3 Add-in Add-inOptions Options Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–15 Breakeven Breakeven Analysis 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.” Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–16 Breakeven Breakeven Analysis 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 ã Fixedcostsarenotrelatedtothevolumeofoutput ã Variablecostsincreaseanddecreasewithoutput Copyrightâ2007TheMcGrawưHill Companies.Allrightsreserved. McGrawư Hill/Irwin117 Assumptions Assumptions of of Break-Even Break-Even Analysis 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 Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–18 Figure Figure1–3 1–3 Total TotalRevenue RevenueIncreases IncreasesLinearly Linearlyas asVolume VolumeIncreases Increases Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–19 Figure Figure1–4 1–4 Fixed FixedCosts Costs Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–20 Figure Figure1–5 1–5 Total TotalVariable VariableCost Cost Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–21 Figure Figure1–6 1–6 Total TotalCost Cost Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–22 Figure Figure1–7 1–7 Profit Profitand andthe theBreak-Even Break-EvenPoint Point Profit Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–23 Example Example11––11 Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–24 Exhibit Exhibit1–4 1–4 Break-Even Break-EvenAnalysis Analysis Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–25 Exhibit Exhibit11–5 –5 Goal GoalSeek SeekInput InputScreen Screen Exhibit Exhibit11–6 –6 Goal GoalSeek SeekOutput OutputScreen Screen Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin  1–26 ... Hill/Irwin ? ?1? ? ?10 Figure Figure1? ?1 1? ?1 The TheManagement ManagementScience ScienceApproach Approach Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin ? ?1? ? ?11 Figure... 2005), p 10 9 Exhibit Exhibit1 -1 1 -1 Excel ExcelSpreadsheet Spreadsheet Copyright © 2007 The McGraw­Hill  Companies. All rights reserved.   McGraw­ Hill/Irwin ? ?1? ? ?13 Exhibit Exhibit 1-2 1- 2 Functions... Importance of of Management Management Science Science • Management science – The discipline of applying advanced analytical methods to help make better decisions – Devoted to solving managerial-type problems