ANDERSON, SWEENEY AND WILLIAMSCHAPTER 1

READ: SECTIONS 1 .1 , 1 .2 , 1 .3 , 1 .4 , 1 .5 , AND APPENDIX 1 .2

Introduction

Chapter 1 Introduction

Body of KnowledgeQuantitative Analysis and Decision MakingMathematical ModelsManagement Science TechniquesModels of Cost, Revenue, and Profit

Body of Knowledge

The body of knowledge involving quantitative approaches to decision making is referred to as Management Science Operations Research Decision Science Operations Management

It had its early roots in World War II and is flourishing in business and industry with the aid of computers

Quantitative Analysis and Decision Making

Potential Reasons for a Quantitative Analysis Approach to Decision Making

Mathematical Models

A mathematical model is a representation of a system which uses mathematical functions.

Advantages of Models

Generally, experimenting with models (compared to experimenting with the real system): requires less time is less expensive involves less risk

Management Science Techniques

Linear Programming* Integer Linear

Programming PERT/CPM* Inventory models Waiting Line Models Simulation*

Decision Analysis* Goal Programming Analytic Hierarchy

Process Forecasting Markov-Process

Models

Example: Ponderosa Development Corp.

Ponderosa Development Corporation(PDC) is a small real estate developer that builds only one style house.

The selling price of each house is $115,000.Land for each house costs $55,000 and lumber,

supplies, and other materials run $28,000 per house. Total labor costs are approximately $20,000 per house.

Example: Ponderosa Development Corp.

Ponderosa leases office space for $2,000 per month.

The cost of supplies, utilities, and leased equipment runs another $3,000 per month.

The one salesperson of PDC is paid a commission of $2,000 on the sale of each house. PDC has seven permanent office employees whose monthly salaries are given on the next slide.

Example: Ponderosa Development Corp.

Employee Monthly SalaryPresident $10,000VP, Development 6,000VP, Marketing 4,500Project Manager 5,500Controller 4,000Office Manager 3,000Receptionist 2,000Total $35,000

Example: Ponderosa Development Corp.

Question:Identify all fixed costs and the variable costs and marginal revenue for each house.

Answer:

Example: Ponderosa Development Corp.

Question:If x denotes the number of homes sold in a given month, write the • monthly cost function, c(x), • monthly revenue function, r(x), and • monthly profit function, p(x),

Homework Status

Before the next class, you should complete the following homework problems in chapter 1: 3, 4, 7, and 11

Example: Ponderosa Development Corp.

Question:What is the breakeven point for monthly

sales of the houses?Answer:

Using Excel for Breakeven Analysis

NOTE: We will use Excel 2013 in this class. If you have an old version of Excel, your tools may be accessed differently.

A spreadsheet software package such as Microsoft Excel can be used to perform a quantitative analysis of Ponderosa Development Corporation.

We will enter the problem data in the top portion of the spreadsheet.

The bottom of the spreadsheet will be used for model development.

Example: Ponderosa Development Corp.

Example: Ponderosa Development Corp.

Question What is the monthly profit if 12 houses

per month are built and sold?

Example: Ponderosa Development Corp.

Question: What is the breakeven point for monthly

sales of the houses?Spreadsheet Solution:

One way to determine the break-even point using a spreadsheet is to use the Goal Seek tool.

Microsoft Excel ‘s Goal Seek tool allows the user to determine the value for an input cell that will cause the output cell to equal some specified value.

In our case, the goal is to set Total Profit to zero by seeking an appropriate value for Sales Volume.

Example: Ponderosa Development Corp.

Data Data Tools What-If Analysis Goal SeekStep 3: When the Goal Seek dialog box appears:

Enter the cell where Total Profit is computed (B9) in the Set cell.

Enter 0 in the To value box Enter the cell where # of homes sold is

entered (B6) in the By changing cell box Select OK

Example: Ponderosa Development Corp.

Example: Ponderosa Development Corp.

Question What is the breakeven point if monthly

salaries are increased to a total of $40,000?

Homework Status

Before the next class, you should complete the following homework problems in chapter 1: 13 and 15

Summary

Body of KnowledgeQuantitative Analysis and Decision MakingMathematical ModelsManagement Science TechniquesModels of Cost, Revenue, and Profit

End of Chapter 1