1.

INTRODUCTION TO
MANAGEMENT SCIENCE
LESSON 1.0

Instructor: Ms. DANA A. FLORENDO, CPA, MM

 MANAGEMENT SCIENCE
 Application of a scientific approach to solving management
problems
 Help managers make better decisions
 Can be used in variety of organizations to solve many
different types of problems
 Encompasses a logical approach to problem solving
 Involves philosophy of approaching a problem in a logical
manner or scientific approach
MANAGEMENT SCIENCE APPROACH
TO SOLVING PROBLEM
THE MANAGEMENT SCIENCE PROCESS

Observation

Problem Definition

Model Construction

Solution

Implementation
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

1.OBSERVATION
• Identifies problem in the system (organization)
• Problems are not always the result of the crisis, but
instead, frequently involve an anticipatory or planning
situation
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

2. PROBLEM DEFINITION
• The problem must be clearly and concisely defined
• Must also include limits of the problem and how
pervasive the problem is
• Existence of the problem implies that the firm’s
objective are not being met in some way; objectives
(goals) of the organization must be clearly identified
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION
• Abstract representation of an existing problem situation
• Can be in a form of graph or chart
• Most frequently it consists of a set of mathematical
relationships (numbers and symbols)
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION
Illustration:
Consider a firm that sells a product. The product costs P5 to
produce and sell for P20. To compute for the profit when an item
is sold is:
� = 20� − 5�
Where:
� = number of units sold
� = total profit that results from the sale of the product
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

Variables (�, �):

3. MODEL CONSTRUCTION - symbol used to
Illustration: represent an item
that can take on any
Consider a firm that sells a product. The productvalue
costs P5 to
produce and sell for P20. To compute for the profit when an item
is sold is: � as the independent
variable
� = 20� − 5�
� as the dependent
Where: variable; depends on the
� = number of units sold number of units sold (x)

� = total profit that results from the sale of the product

THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION Parameters (20,  5):

Illustration: - Known, constant
values that are often
Consider a firm that sells a product. The product costs P5ofto
coefficients the
produce and sell for P20. To compute for the profit when
variables an item
in equations.
is sold is: - These are derived
from data
� = 20� − 5�
Data
Where: - Pieces of information
� = number of units sold from the problem
environment
� = total profit that results from the sale of the product
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION
Illustration (expanded):
Suppose the product is made from steel and the business firm has
available steel of100 kgs. It takes 4 kgs of steel to make each unit
of product.
4� = 100
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION
Illustration (expanded):
Thus, the model has two equations (relationships):

A MODEL is a
� = 20� − 5� Functional Relationship
that includes variables,
4� = 100 parameters, and equations.

Where � is the decision variable

THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

3. MODEL CONSTRUCTION
Illustration (expanded):
Thus, the model has two equations (relationships):

Objective function
Maximize � = 20� − 5� (profit equation)

subject to 4� = 100 Constraint

(resource equation)
Where � is the decision variable
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

4. MODEL SOLUTION
• Problem solution
• Solution technique usually applies to specific model type
“A model is solved because the model represents a problem.”
 THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

4. MODEL SOLUTION
§ Solve the constraints function:
Illustration (previous model):
4� = 100
Maximize � = 20� − 5� 100
�=
Subject to 4� = 100 4
� = 25 units

ü Solution technique: § Substitute the value of 25 for � to

profit function:
Simple algebra
� = 20� − 5�
= 20 25 − 5 25
= 500 – 125
= P375
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

4. MODEL SOLUTION
• The value of the decision variable does not constitute
the actual decision, rather:
o It is information that serves as recommendation for
decision making
o Some also provides descriptive results of the system
model (e.g. information on monthly average sales in units
for the year)
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

4. MODEL SOLUTION
Monthly Sales Data for the past year:
MONTH SALES MONTH SALES Monthly Sales Average
January 30 July 35 = (480 units ÷12)
February 40 August 50 = 40 units
March 25 September 60
April 60 October 40 The result does not provide a
May 30 November 35 decision, rather, a descriptive
June 25 December 50 result that provide information.
Total 480 units
THE MANAGEMENT SCIENCE APPROACH TO SOLVING PROBLEM

5. IMPLEMENTATION
• Actual use of model once it has been developed
• Critical in the process (but often overlooked)

• If management science model and solution are not

implemented, then the effort and resources used in their
development have been wasted.
THE MANAGEMENT SCIENCE PROCESS

Observation

Problem Definition

Model Construction

Solution

Implementation
 Management
Science Techniques

Linear Mathematical Probabilistic

Network Techniques Other Techniques
Programming Techniques

o Linear o Probability and o Network flow o Analytical hierarchy

programming statistics o Project process (AHP)
models o Decision analysis management o Nonlinear
o Graphical analysis o Queuing (CPM/PERT) programming
o Sensitivity analysis o Simulation
o Simplex method o Forecasting
o Transportation, o Inventory
transshipment, and o Game theory
assignment o Markov analysis
o Integer linear
programming
o Goal programming
 Linear Mathematical Programming Network Techniques
 used predetermined set of mathematical  consist of models that are represented as
steps to solve a problem diagrams rather than as strictly
 helps managers determine solutions for mathematical relationships
problems that will achieve some objective  offer a pictorial representation of the
in which there are restrictions system under analysis

Probabilistic Techniques Other Techniques

 the result of this techniques are  other topics that are not easily
probabilistic or those that contain categorized
uncertainty - possibility that alternative
solutions might exist
MODEL BUILDING: BREAK-EVEN ANALYSIS
BREAK-EVEN ANALYSIS
 A modeling technique to determine the number of units to sell or
produce that will result in zero profit.
 Components of Break-even Analysis:
o Volume – level of sales or production by a company (i.e., quantity)
o Cost – what the company incurred in the production of a product
o Profit – the difference between the Total Revenue and Total Cost
BREAK-EVEN ANALYSIS
 2 Types of Cost:
o Fixed Cost – are independent of volume and remain constant
o Variable Cost – are dependent on the number of items produced
 Total Cost – equals to Fixed Cost + (Variable Cost multiplied by
Volume)
TC = FC + (VC * Q)
Where:
TC – Total Cost; FC – Fixed Cost;
VC – Variable Cost; Q – Volume or Quantity
BREAK-EVEN ANALYSIS
 Total Revenue – equals to Price per unit multiplied by Volume

Where:
TR = P * Q TR – Total Revenue; P – Price;

 Thus,
Profit (Z) = TR - TC
OR
� = �� − �� − �� × �
Problem Illustration:

Waist Clothing Company, produces denim jeans. The company incurs the
following monthly costs to produce:
Fixed cost = P100,000; Variable cost = P80 per pair of jeans
If the monthly sales volume is 400 pairs of jeans, how much is the monthly
Total Cost?
�� = �� + �� ∗ � Where:
= 100,000 + 80 ∗ 400 TC – Total Cost; FC – Fixed Cost;
VC – Variable Cost; Q – Volume or
= 100,000 + 32,000 Quantity

TC = 132,000
Problem Illustration:

If the denim jeans sells for P230 per pair and we sell 400 pairs of jeans per
month, how much is the monthly Total Revenue?

�� = � ∗ � Where:
= 230 ∗ 400 TR – Total Revenue; P – Price;
Q – Quantity
TR = 92,000

How much is the monthly Total Profit?

�� = ��  − ��
= 92,000 − 132,000
TP =− 40,000
Problem Illustration:

If we assume the price is static, and the fixed cost and variable cost are not
subject to change, what should be the volume the company should produce
and sell to break-even?
� = �� − �� − �� ∗ �
0 = 230 ∗ � − 100,000 − 80 ∗ �
0 = 230� − 100,000 − 80�
230� − 80� = 100,000
150� = 100,000
150� = 100,000
150
� = ���. �
BREAK-EVEN ANALYSIS
Revenue, Cost & Profit (P1,000s)
500 Total Revenue

400

300 Profit
Break-even Total Cost
200 Variable Cost

100 Fixed Cost

Loss
0

00
00
0

00
00
0
40
20

60

80

14
10

16
12
Volume, (Q)
Reference:
Bernard W. Taylor, I. (2013). Introduction to Management Science (11th Edition). USA: Pearson Education,
Inc