Introduction to
Management Science
with Spreadsheets
Stevenson and Ozgur
First Edition
Part 1 Introduction to Management Science and Forecasting
Chapter 1
Introduction to Management
Science, Modeling, and
Excel Spreadsheets
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
The Importance of Management 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.
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Table 1–2
Successful Applications of Management Science
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McGraw-Hill/Irwin 1–3
Table 1–2
Successful Applications of Management Science (cont’d)
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Problem Solving Approaches
• Managers tend to use a
qualitative approach to
problem solving when
1. The problem is fairly
simple.
2. The problem is
familiar.
3. The costs involved
are not great.
Copyright © 2007 The McGraw-Hill Companies. All rights reserved.
• Managers tend to use a
quantitative approach
when
1. The problem is
complex.
2. The problem is not
familiar.
3. The costs involved
are substantial.
4. Enough time is
available to analyze
the problem.
McGraw-Hill/Irwin 1–5
Advantages of the Quantitative 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.
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Models
• 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
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Deterministic versus Probabilistic 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).
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Figure 1–1
The Management Science Approach
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Breakeven 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.”
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Breakeven 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
• Fixed costs are not related to the volume of output.
• Variable costs increase and decrease with output.
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Assumptions of Break-Even 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.
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Figure 1–3
Total Revenue Increases Linearly as Volume Increases
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Figure 1–4
Fixed Costs
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Figure 1–5
Total Variable Cost
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Figure 1–6
Total Cost
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Figure 1–7
Profit and the Break-Even Point
Profit
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Example 1–1
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