Chapter 1:Introduction to Managerial

Decision Modeling

© 2007 Pearson Education

What is Decision Modeling?

A scientific approach to managerial decision making

• The development of a (mathematical) model of a real-world scenario

• The model provides insight into the solution of the managerial problem

Types of Decision Models

• Deterministic ModelsWhere all the input data value are known with complete certainty

• Probabilistic ModelsWhere some input data values are uncertain

Quantitative vs. Qualitative Data

The modeling process begins with data

• Quantitative DataNumerical factors such as costs and revenues

• Qualitative DataFactors that effect the environment which are difficult to quantify

Spreadsheets in Decision Making

• Computers are used to create and solve models

• Spreadsheets are a convenient alternative to specialized software

• Microsoft Excel has extensive modeling capability via the use “add-ins”

Steps in Decision Modeling

1. FormulationTranslating a problem scenario from words to a mathematical model

2. SolutionSolving the model to obtain the optimal solution

3. Interpretation and Sensitivity AnalysisAnalyzing results and implementing a solution

Steps in Modeling

Example Model: Tax ComputationSelf employed couple must estimate andpay quarterly income tax (joint return)

• Income amount is uncertain• 5% of income to retirement account, up to

$4000 max• Personal exemption = 2 x $3200 = $6400• Standard deduction = $10,000• No other deductions

Tax Brackets

Percent of Taxable Income Taxable Income up to $14,600 10%$14,601 to $59,400 15%$59,401 to $119,950 25%

Example Model: Break-Even Analysis

Profit = Revenue – Costs

Revenue = (Selling price) x (Num. units)

Costs = (Fixed cost) + (Cost per unit) x (Num. units)

The Break Even Point (BEP) is the number of units where;

Profit = 0, so Revenue = Costs

BEP = Fixed cost

(Selling price) – (Cost per unit)

Possible Problems in Developing Decision Models

Defining the Problem

• Conflicting viewpoints

• Impact on other departments

• Beginning assumptions

• Solution outdated

Possible Problems inPossible Problems in Developing Decision ModelsDeveloping Decision Models

Developing a Model

• Fitting the textbook models

• Understanding the model

Acquiring Input Data

• Using accounting data

• Validity of data

Possible Problems in Developing Decision Models

Developing a Solution• Hard to understand mathematics

• Limitations of only one answer

Testing the Solution

Analyzing the Results

Implementation