Principles of Management (HS16101) : National Institute of Technology Sikkim

NATIONAL INSTITUTE OF TECHNOLOGY SIKKIM
Ravangla Campus
Barfung Block, Ravangla Sub Division, South Sikkim-737139
Department of Mechanical Engineering
Principles of Management (HS16101)
Module: 1 Lecture No: 6
Learning Objectives
 To discuss different decision making conditions.

 To learn different decision making techniques.
 To derive the mathematical model of Economic Order Quantity (EOQ).
 To solve problems on EOQ.
 To derive the mathematical model of Break-Even Point (BEP) analysis.
 To solve problems on BEP analysis.
Important & Relevant Questions
 Identify the different decision making conditions in industry with suitable examples.
 What are the differences between PERT and CPM techniques?
 What are the practical significances of Economic Order Quantity and Break-Even point
analysis?
Evaluation Questions
 How much risk is associated with decisions made under certainity, under risk and under
uncertain conditions?
 What are the primary mathematical techniques used by the decision-makers in industry?
 Where PERT and CPM techniques are applied?
 In which situation LPP technique is used by the decision-makers in industry?
 What is BEP and EOQ?
References
 Koontz H. and Weihrich H., Essentials of Management: An International, Innovation,

and Leadership Perspective, Ed. 3, McGraw Hill Education Private Limited, India.
 Bhat A. and Kumar A., Management: Principles, Processes, and Practices, Ed. 10,
Oxford University Press, India.
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Decision making conditions

Just as there are different kinds of decisions, there are also different conditions in which
decisions must be made. Managers sometimes have an almost perfect understanding of
conditions surrounding a decision, but at other times they have few clues about the
conditions. In general, the circumstances that exist for the decision maker are conditions of
certainity, risk, or uncertaininty.
 Decision making under certainity
Conditions under certainity are which the decision maker has full and needed
information to make a decision. The manager knows exactly what the outcome will
be, as he/she has enough clarity about the situation and knows the resources, time
available for decision-making, the nature of the problem itself, possible alternatives
to resolve the problem, and undoubtedly clarify or certain with the result of
alternatives. In most situations, the solutions are already available from the past
experiences or incidents and are appropriate for the problem at hand. There is,
therefore, little chance to make a bad decision. For example, the decision to restock
when the goods in stock fall below a determined level.
 Decision making under risk
Conditions under risk provide probabilities regarding expected results for decision-
making alternatives, it is due to the nature of the future conditions that are not
always known in advance and the managers face this condition more often in reality
compared to conditions under certainity. Although some good information may be
available, it is not enough to answer all questions about the outcomes. The manager
could define the nature of the problem, possible alternatives and probability of each
alternative leading to the desired results, but could not guarantee how each
alternative may work. Therefore, there is a more chance of making a bad decision
compared to the decision made under certainity. Decision has clear goals, but future
outcomes associated with each alternative are subjected to chance. For example,
testing of nuclear leakage in Japan after the Tsunami hit in year 2011 is a risky
decision made by Japanese Government, as the government do not know how wide
the range of effecting area and the nuclear substance itself is a life threatening
factor.
 Decision under uncertainity
Conditions under uncertainity provide no or incomplete information, many
unknowns and possibilities to predict expected results for decision-making
alternatives. The manager can not even assign subjective probabilities to the likely
outcomes of alternatives. Each of the possible states of nature of the problems
causes the manager himself can not predict with confidence what the outcomes of
his/her action to be. An assumption is often made; the manager has no information
or intuitive judgment to use as a basis for assigning the probabilities to each state
of nature. Managers may have to come up with creative approaches and alternatives
to solve the problem. There is major chances ocf making bad decisions. Flood, for
example, may causes panic and an environment of uncertainity among the victims,
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which leads to uncertain decisions making of the victims, some may flee from home
and take only important documents with them, some who live at higher ground, may
wait and observe if the flood worsen then decide the next approach.
Decision making tools and techniques
There are a number of tools and techniques, which are used by the decision-makers in
industry. However, the basic mathematical techniques which are often used in decision
making in industry listed below.
 Decision tree
 Decision matrices
 Linear programming
 Game theory
 PERT (Program Evaluation and Review Technique)
 CPM (Critical Path Method)
 EOQ (Economic Order Quantity)
 Break-even point analysis
 Decsion tree
A decision tree is a flowchart-like structure in which each internal node
represents a test on an attribute (e.g. whether a coin flip comes up heads or
tails), each branch represents the outcome of the test, and each leaf node
represents a class label (decision taken after computing all attributes). The
following is an example of decision tree for “Playing tennis”.
Figure 1: Decision tree

 Decision matrix
A decision matrix is a list of values in rows and columns that allows an
analyst to systematically identify, analyze, and rate the performance of
relationships between sets of values and information. Elements of a decision
matrix show decisions based on certain decision criteria. The following is
an example of decision matrix for “Choosing a car”.
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Figure 2: Decision matrix
 Game theory
Game theory is a theoretical framework for conceiving social situations
among competing players. In some respects, game theory is the science of
strategy, or at least the optimal decision-making of independent and
competing actors in a strategic setting. The following is an example of game
matrix between two competitors in the market.
Figure 3: Game matrix
 Program Evaluation and Review Technique (PERT)

A PERT chart is a visual representation of a series of events that must occur
within a project’s lifetime. The direction of arrows indicates the flow and
sequence of events required for project completion. In a PERT chart, circles
or rectangles are called nodes, which are used to represent project events or
milestones. A PERT chart allows managers to evaluate the time and
resources necessary to manage a project. This evaluation includes the ability
to track required assets during any stage of production in the course of the
entire project. The following is an example of PERT chart for a project.
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Figure 4: PERT
 Critical Path Method (CPM)

The critical path method (CPM) is an algorithm for scheduling a set of
project activities. It is commonly used in conjunction with the program
evaluation and review technique (PERT). A critical path is determined by
identifying the longest stretch of dependent activities and measuring the
time required to complete them from start to finish. The following is an
example of CPM chart for a project.
Figure 5: CPM
 Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ) is the number of units that a company
should add to inventory with each order to minimize the total costs of
inventory—such as holding costs, order costs, and shortage costs. It is a tool
used to determine the volume and frequency of orders required to satisfy a
given level of demand while minimizing the cost per order.
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Figure 6: EOQ model

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Problems on EOQ
1. A company’s annual demand is 18000 units and price/unit is Rs. 4.
If ordering cost is Rs. 120/order and the inventory carrying cost is
12% of unit purchase price. Determine the economic order quantity
and the number of orders to be placed.
2. A company makes bicycles. It produces 450 bicycles a month. It

buys the tires for bicycles from a supplier at a cost of Rs. 20/tire. The
company’s inventory carrying cost is estimated to be 15% of the cost
and the ordering cost is Rs. 550/order. Calculate the EOQ and the
total number of orders per year.
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 Break-Even Point (BEP) analysis

A break-even analysis is a financial tool which helps you to determine at
what stage your company, or a new service or a product, will be profitable.
In other words, it's a financial calculation for determining the number of
products or services a company should sell to cover its costs. At break-even
point, there is no profit no loss.
Figure 7: BEP analysis

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Problems on BEP analysis

1. A product can be produced by four process as given below. To
produce 100 units which process should be preferred.
2. A company plans to set up a new workshop for the production of

mobile chargers. The fixed cost for the new workshop is Rs. 50,000/-
and the variable cost is Rs. 75/- per unit. If the company decides to
sell its products at Rs. 125/- per unit, what is the break-even quantity
and how many mobile chargers the company need to sell in order to
earn a profit of Rs. 20,000/-.

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NATIONAL INSTITUTE OF TECHNOLOGY SIKKIM

Module: 1 Lecture No: 6

 To discuss different decision making conditions.

Important & Relevant Questions

 Koontz H. and Weihrich H., Essentials of Management: An International, Innovation,

Decision making conditions

Figure 1: Decision tree

Figure 2: Decision matrix

Figure 3: Game matrix

 Program Evaluation and Review Technique (PERT)

 Critical Path Method (CPM)

Figure 6: EOQ model

2. A company makes bicycles. It produces 450 bicycles a month. It

 Break-Even Point (BEP) analysis

Figure 7: BEP analysis

Problems on BEP analysis

2. A company plans to set up a new workshop for the production of

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