Download - Chapter 1 Management
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• Solution outdated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