BQB 2113
MANAGEMENT SCIENCE
CHAPTER 1
INTRODUCTION TO
MANAGEMENT SCIENCE
Courseware :
Go to VOISS>>BQB2113>> Courseware>> Web courseware
OUTLINE
Management Science (MS) : Definition and
Concepts
Problem Solving and Decision Making
Quantitative Analysis and Decision Making
Model of Cost, Revenue and Profit
Exercise
What Is Management Science?
Quantitative approach to decision making
Based on the scientific method of problem solving
Areas of application : forecasting, capital budgeting,
capacity planning, scheduling, inventory
management, project management & production
planning.
Synonymous with operation research and decision
science
Brief history of management science
What Is Management Science?
• Scientific Management Revolution
Scientific Management Revolution
Early 1900s
World War II
Dantzig, 1947
Computer Software
Problem Solving and Decision Making
What is problem solving ?
Process of identifying a difference between the actual and desired
state of affairs and taking action to resolve the difference
7 Steps in Problem Solving
Identify and define the problem.
Determine the set of alternative solutions.
Decision Making
Determine the criteria for evaluating the alternatives.
Evaluate the alternatives.
Choose an alternative.
Implement the chosen alternative.
Evaluate the results
Example:
You are currently unemployed. You have received offers from
the companies in 3 different locations : KL, JB, Penang.
Quantitative Analysis and Decision Making
Qualitative Analysis
based on judgement and experience
Quantitative Analysis Process
Model Development
Data Preparation
Model Solution
Report generation &
implementation
Quantitative Analysis and Decision Making
Qualitative VS Quantitative Analysis
Qualitative Approach Quantitative Approach
1. Problem is simple 1. A problem is complex
2. Problem is familiar 2. Problem is not familiar
3. Cost are not great 3. Cost are substantial
4. Immediate decision are needed 4. Enough time to analyze
Quantitative Analysis and Decision Making
Quantitative Analysis Process
Step 1 : Model Development
definition: representation of real objects
Iconic Model: replicas of real objects, eg:airplane, truck
Analog model : do not have the same physical
appearance as the object being modeled. Eg:thermometer
Mathematical Model : quantitative approach to decision
making
Example: Assume that shop XYZ sold only 2 products, x1 & x2.
The products are sold with a profit of RM5 for unit X1 and RM
8 for unit X2 . Mathematical model=?
If x1=10, x2=20, total profit =? X = No. of units sold
Step 1 : Model Development
objective function Profit = 5x1 + 8x2
maximize profit or minimize cost
decision variables/controllable inputs
inputs that are controlled by the decision maker. Eg:
uncontrollable inputs (Environmental factors)
inputsthat the decision maker cannot influence. Eg:profit
deterministic model : if the uncontrollable input are known and
cannot vary. Eg: corporate income taxes
stochastic model : if the uncontrollable input are uncertain and
subject to variation Eg : DD for a product
constraints
Restriction on the resources available to a firm.Eg: 5 hours are
required to produce each unit and only 40 hours are available
per unit.
Step 1 : Model Development
Transforming Model Inputs into Outputs
Uncontrollable Inpus
(Environmental Factors)
Controllable Inputs Mathematical Output
(Decision Variables) Model (Projected Results)
Step 1 : Model Development
Exercise: A construction company build a 250 unit
complex. The project consists of hundreds of activities
involving excavating, framing, wiring, plastering,
painting, landscaping etc. Some of the activities must
be done sequentially and other can be done
simultaneously.
Q1: How could management science be used to solve
this problem ?
Q2 : What would be the :
uncontrollable inputs
decision variables
Objective function
Constraints
Quantitative Analysis Process
Step 2 : Data Preparation
refer to the values of unknown uncontrollable inputs
Step 3 : Model Solution Profit = 5x1 + 8x2
Identify the decision variables that provide best
output
Trial & error or special solution procedures
Step 4 : Report Generation & implementation
Managerial report based on model solution
include recommended decision & other pertinent
information
Model of Cost, Revenue and Profit
(Component of Break-even Analysis)
Volume
levelof output of a machine, department, or organization or the
quantity of sales
expressed as number of units that are produced or sold
Revenue
income generated by the sale of a product
Total revenue = selling price per unit (P) X no. of units (Q)
eg:
P
TR
0 Q
Model of Cost, Revenue and Profit
(Component of Break-even Analysis)
Costs
fixed costs : cost that are not related to the volume of output.
Eg: rental
Variable cost : expenses that vary with volume. Eg: raw material
Total costs : Fixed cost + Variable cost
TC
P
P P
TVC
FC
0 Q 0 Q
0 Q
Model of Cost, Revenue and Profit
(Component of Break-even Analysis)
Profits
Profit = Total revenue - (Fixed cost + Total variable cost)
Graph
Break even point (TR = TC)
volume for which total revenue and total cost are equal
to break even, profit must be equal to zero
QBEP = FC / [R per unit -VC per unit]
Model of Cost, Revenue and Profit
(Component of Break-even Analysis)
Exercise
Example : The Exxoff Corporation produces an automotive
lubricant that is sold to wholesale distributors for $25 a case.
Fixed costs are $80,000 and variable costs are $15 per case.
What is the total cost if 1,000 cases are sold?
What is the break-even volume if 1,000 cases are sold?
