INTRODUCTION TO

MANAGEMENT
SCIENCE
Chapter 1
Management Science

Is the application of a scientific approach to solving management problems

in order to help managers make better decisions.

Is a recognized and established discipline in business.

- Also referred to as operations research, quantitative analysis, and

decision sciences.
The Management Science Approach to
Problem Solving

Observation Definition of the Model Model Solution Implementation

problem Construction
OBSERVATION

Is the identification of a problem that exists in the system

The system must be continuously and closely observed so that problems can be
identified as soon as they occur.

Problems are not always the result of a crisis that must be reacted to but, instead,
frequently involve an anticipatory or planning situation
Definition of the Problem

The problem must be clearly and concisely defined.

Improperly defining a problem can easily result in no solution or

an inappropriate solution.

A stated objective helps to focus attention on what the problem

actually is.
Model Construction

A management science model is an abstract representation of an existing problem

situation.

It can be in the form of a graph or chart, but most frequently a management science
model consists of a set of mathematical relationships (are made up of numbers and
symbols).
Model Construction

- For example: Consider a business firm that sells a product. The product costs P5 to produce and sells
P20.

- A model that computes the total profit that will accrue from the items sold is:
Model Solution

Once models have been constructed, they are solved using the management science techniques presented.

A management science solution technique usually applies to a specific type of model.

Thus, the model type and solution methods are both part of the management science technique.

We can say that a model is solved because the model represents a problem.

When we refer to model solution, we also mean problem solution.

Model Solution

- Thus, if the manager decides to produce 25 units of the product and all 25 units sell, the business firm
will receive P375 in profit.

- Substituting the value of 25 for x into the profit function results in the total profit:

=
Implementation

The final step in the management science process.

It is the actual use of the model once it has been developed.

Model Building: Break-Even Analysis
(Profit Analysis)

Purpose: To determine the number

of units of a product to sell or Break- even point – the point where
produce that will equate total total revenue equals total cost
revenue with total cost.
Components of Break-Even Analysis:

1. Volume

- it is the level of sales or production by a company.

- it can be expressed as the number of units produced and sold, as the volume of sales, or
as a percentage of total capacity available.
Components of Break-Even Analysis:

2. Cost – incurred in the production of a product

2 Types:

a. Fixed Costs – remain constant regardless of how many units of product are
produced within a given range

- can include such items as rent on plant and equipment, taxes, staff
and management salaries, insurance, advertising, depreciation, heat and light, and plant
maintenance
Components of Break-Even Analysis:

b. Variable Costs – are determined on a per- unit basis

- depend on the number of units produced

- include such items as raw materials and resources, packaging, material

handling, and freight

Total Variable Costs are a function of the volume and the variable cost per unit. This relationship can be
expressed mathematically as:

total variable cost =

where VC is the variable cost per unit and x is the volume sold
Components of a break-even Analysis:

The total cost of an operation is computed by summing total fixed cost and total variable cost:

total cost = total fixed cost + total variable cost

TC = FC + VCx

Example:

Consider the clothing company which produces denim jeans. The company incurs the following
monthly costs to produce denim jeans: FC=P10,000; VC=P8 per pair. If we arbitrarily let the monthly
sales volume equal 400 pairs of denim jeans, the total cost is

TC= FC + VCx = 10,000+8(400) = 13,200

Components of a break-even Analysis:

3. Profit
- is the difference between total revenue and total cost. Total revenue is the volume multiplied by the
price per unit,

Where
For our clothing company example, if denim jeans sell for P23 per pair and we sell 400 pairs per month, then
the total monthly revenue is

Now that we have developed relationships for total revenue and total cost, profit (Z) can be computed as
follows:
Computing the Break-even Point:

- For our clothing company example, we have determined total revenue and total cost to be P9,200
and P13,200, respectively. With these values, there is no profit but, instead, a loss of P4,000:

We can verify this result by using our total profit formula,

And the values x

Computing the Break-even Point:

- At the break-even point, where total revenue equals total cost, the profit, Z, equals zero. Thus, if we
let profit, Z equal zero in our total profit equation and solve for v, we can determine the break-even
volume:

x
 
Graphical Solution

- It is possible to represent many of the management science models graphically and use these graphical
models to solve problems. Graphical models also have the advantage of providing a “picture” of the
model that can sometimes help us understand the modeling process. We can easily graph the break-
even model for our Clothing Company example because the functions for total cost and total revenue
are linear.
- In the graph of our previous example (see figure 1.1), the fixed cost,FC, has a constant value of P10,000,
regardless of the volume. The total cost line, TC, represents the sum of variable cost and fixed cost. The
total cost line increases because variable cost increases as the volume increases. The total revenue line
also Increases as volume increases, but at a faster rate than total cost. The point where these two lines
intersect indicates that total revenue equals total cost. The volume , v, that corresponds to this point is
the break-even volume. The break-even volume is 666.7 pairs of denim jeans.
Break-even Model: