College of Accountancy and Business Administration Management Science Concerned with developing and applying models and concepts that help to illuminate management issues and solve managerial problems A scientific approaches to problem solving and decision making Used in variety of organizations to solve many different types of problems (investment, resource allocation, production mix, marketing, scheduling, etc) Why Study Management Science? Gain an appreciation for the relevance and power of MS Learn to recognize when MS can and cannot be fruitfully applied Learn how to apply the major techniques of MS to analyze a variety or managerial problems Develop an understanding of how to interpret the results of an MS study Uses Scientific Approach Define the problem and gather of data Formulate a model to represent the problem Develop a computed-based procedure for deriving solutions to the problem from the model Test the model and refine it as needed Apply the model to analyze the problem and develop recommendations for management Help to implement the team’s recommendations that are adopted by management Management Science Process Observation – identification of a problem of an organization Management scientist is a skilled person in MS techniques Management Science Process Problem Definition – problem must be clearly and consistently defined showing its boundaries and interaction with the objectives of the organization Management Science Process Model Construction– development of the functional relationships that describe the decision variables, objective function and constraints of the problem The product costs P5 to produce and sells for P20 Z=P20x-P5x Equation as a whole is functional relationship Management Science Process Model Construction– The product is made from steel and that the business firm has 100 pounds of steel available; 4 pounds of steel to make each product 4x = 100 lbs Z=P20x-P5x Objective function (Z) – profit equation Constraint (Steel) – resource equation maximize Z=P20x-P5x, subject to 4x=100lbs Management Science Process Model Solution– Model solved using MS techniques maximize Z=P20x-P5x, subject to 4x=100lbs Simple algebra solution: x=100 x=100/4 x=25units Profit function substitution Z=P20x-P5x 20(25)-5(25) P375 Management Science Process Model Implementation– actual use of the model or its solution Model Construction: Example Problem Definition Information data: A bakery makes and sells birthday cakes (Cake A & Cake B) Cake A cost P100 to produce, Cake B costs P120 Cake A sells for P200, while Cake B sells for P250 Cakes A & B require 0.5 and 0.8 pounds of double cream to make The bakery has 20 pounds of double cream for each day Business problem: Assuming all cakes produced can be sold out, determine the number of different cakes to produce to make the most profit given the limited amount of double cream available Model Construction (Mathematical Model): Example Decision Variable: Information data: x=number of Cake A to produce A bakery makes and sells y=number of Cake B to produce birthday cakes (Cake A & Z=total profit Cake B) Model: Cake A cost P100 to produce, Cake B costs Z=P200x+P250y-P100x-P120y (objective function) P120 0.5x+0.8y <=20lbs of double cream (resource Cake A sells for P200, while constraint) Cake B sells for P250 Parameters: Cakes A & B require 0.5 P200, P250, P100, P150, 0.5lbs, 20lbs (known and 0.8 pounds of double values) cream to make Formal specification of model: The bakery has 20 pounds of double cream for each maximize Z=P200x+P250y-P100x-P120y day Subject to 0.5x+0.8y <=20lbs MS Modeling Techniques Problem Solving and Decision Making Problem Solving – the process of identifying a difference between the actual and desired state of affairs 7 Steps of Problem Solving Identify and define the problem Determine the criteria for evaluating alternatives Determine the set of alternative solutions Evaluate the alternatives Choose an alternative Implement the selected alternative Evaluate the results Problem Solving and Decision Making
Decision-Making Process
Single-criterion decision problems – the objective is
to find the best solution Multi-criteria decision problems – involve more than 1 criterion Qualitative vs Quantitative Analysis
Analysis Phase of Decision-Making Process
Qualitative Analysis - based largely on the manager’s judgment and experience Quantitative Analysis – concentrate on the quantitative facts with the problem, development of mathematical expressions to make recommendations. Quantitative Analysis
Reasons for Quantitative Analysis Approach to Decision-
Making - The problem is complex - The problem is very important - The problem is new - The problem is repetitive Quantitative Analysis
Quantitative Analysis Process
- Model development - Data preparation - Model solution - Report generation Quantitative Analysis
Models – representations of real objects or situations
- Iconic models – physical replicas of real objects - Analog models – physical in form, nut do not physically resemble the object being modeled - Mathematical model – represents real world problems through a system of mathematical formulas and expressions Deterministic vs Stochastic Models
Deterministic Model – if all uncontrollable inputs to the
model are known and cannot vary Stochastic (Probabilistic) Model – if any uncontrollable are uncertain and subject to variation Transforming Model Inputs into Output ABC Co. Break-Even Analysis
An important type of cost-volume analysis, focuses on
relationships between cost, revenue, and volume of output Estimates the income of an organization under different operating conditions A simple way to determine price levels and to estimate whether an expansion or cost saving project makes good business sense Break-Even Analysis
Fixed cost - independent of the volume of units
produced and sold Variable cost - determined on a per-unit basis Total variable cost – cost that changes based on activities Total revenue – selling price per unit x sales volume (pQ) where p is the selling price per unit Profit – difference between total revenue and total cost Total Cost = total fixed cost + total variable cost Example: BEP analysis of ABC Co. The ABC Co. produces expensive and unusual gifts to be sold in stores that cater to affluent customers who already have everything. The latest new- product proposal to management from the company’s research department is limited edition grandfather clock. Management needs to decide whether to introduce this new product and, if so, how many of these grandfather clocks to produce? Before making this decision, a sales forecast will be obtained to estimate how many cloaks can be sold. Management wishes to make the decision that will maximize the company’s profit. If the company goes ahead with this product, a fixed cost of P50,000 would be incurred for setting up the production facilities to produce this product. In addition to this cost, there is a production cost that varies with the number of clocks produced. The unit variable (marginal) cost is P400/clock produced Each clock sold would generate a revenue of P900 for the company Q = #of grandfather clocks to produce (decision variable) Cf = P50,000 if Q>0 (Cf=0, if Q=0) Cv = P400/unit p = P900/unit Total variable cost = P400Q Total cost = P50,000 + P400Q Total revenue = P900Q Profit = Total revenue - Total cost = P900Q – (P50,000 + P400Q) Q b/e = FC/(sales price per unit-VC per unit) = 50,000 / (900-400) = 50,000/500 = 100units 100units, BEP Example: BEP analysis of ABC Co. Example: Ponderosa Dev Corp Example: Ponderosa Dev Corp
Questions: 1. Identify all cost and denote the marginal cost and marginal revenue for each house 2. Write the monthly cost function c(x), revenue function r(x), and profit function p(x) 3. What is the BEP for monthly sales of the house? 4. What is the monthly profit if 12 houses per month are built and sold? Example: Ponderosa Dev Corp Questions: 1. Identify all cost and denote the marginal cost and marginal revenue for each house Answer: FC = salaries + lease + supply cost = $35,000 + $2,000 + $3,000 = $40,000 MC = cost land + materials + labor cost + commission cost = $55,000 + $28,000 + $20,000+$2,000 =$105,000 MR = $115,000 Example: Ponderosa Dev Corp
Questions: 2. Write the monthly cost function c(x), revenue function r(x), and profit function p(x) Answer: c(x) = VC + FC = $105,000x + $40,000 r(x) = $115,000x p(x) = r(x) – c(x) = $10,000x - $40,000 Example: Ponderosa Dev Corp Questions: 3. What is the BEP for monthly sales of the house? Answer: r(x) = c(x) $115,000x = $105,000x + $40,000 BEP = FC/SP-VC = 40,000/(115,000-105,000) = 40,000/10,000 x = 4 houses Example: Ponderosa Dev Corp
Questions: 4. What is the monthly profit if 12 houses per month are built and sold? Answer: p(12) = $10,000 (12) - $40,000 = $80,000 monthly profit
