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

Learning Objectives
After completing this chapter, you should be able to:
1. Describe the importance of management science.
2. Describe the advantages of a quantitative approach
to problem solving.
3. List some of the applications and use of
management science models.
4. Discuss the types of models most useful in
management science.
5. Demonstrate the basic building blocks and
components of Excel.
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Learning Objectives (contd)

After completing this chapter, you should be able to:
6. Describe the basic nature and usefulness of breakeven analysis.
7. List and briefly explain each of the components of
break-even analysis.
8. Solve typical break-even problems manually and
with Excel.

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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.

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Table
Table12
12

Successful
SuccessfulApplications
ApplicationsofofManagement
ManagementScience
Science

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Table
Table12
12

Successful
SuccessfulApplications
ApplicationsofofManagement
ManagementScience
Science(contd)
(contd)

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Problem
Problem Solving
Solving Approaches
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.

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.

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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.

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Models
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
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).

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Figure
Figure11
11

The
TheManagement
ManagementScience
ScienceApproach
Approach

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Figure
Figure12
12

DSS
DSSFramework
Framework

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.

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Exhibit
Exhibit1-1
1-1

Excel
ExcelSpreadsheet
Spreadsheet

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Exhibit
Exhibit1-2
1-2

Functions
FunctionsScreen
Screen

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Exhibit
Exhibit13
13

Add-in
Add-inOptions
Options

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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.
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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
Fixed costs are not related to the volume of output.
Variable costs increase and decrease with output.

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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.
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Figure
Figure13
13

Total
TotalRevenue
RevenueIncreases
IncreasesLinearly
Linearlyas
asVolume
VolumeIncreases
Increases

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Figure
Figure14
14

Fixed
FixedCosts
Costs

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Figure
Figure15
15

Total
TotalVariable
VariableCost
Cost

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Figure
Figure16
16

Total
TotalCost
Cost

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Figure
Figure17
17

Profit
Profitand
andthe
theBreak-Even
Break-EvenPoint
Point

Profit

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Example
Example1111

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Exhibit
Exhibit14
14

Break-Even
Break-EvenAnalysis
Analysis

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Exhibit
Exhibit115
5

Goal
GoalSeek
SeekInput
InputScreen
Screen

Exhibit
Exhibit116
6

Goal
GoalSeek
SeekOutput
OutputScreen
Screen

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