NAGA COLLEGE FOUNDATION, INC.

M.T. Villanueva Avenue, Naga City

College of Accountancy and Finance
Management Science

Module No. 01
Introduction to Management Science

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OVERVIEW:
The first module was about what the management science is and the approach
used in to solve management science problems.

LEARNING OUTCOMES:
a) Able to define and elaborate Management Science.
b) Evolution of Management
c) Management Science approach.
d) Components of Break-even analysis.
e) Using spreadsheet in solving break-even point.

1. Is Management a Science or an Art?

2. What is Management Science?
3. Management is a science?
a. Applied
b. Exact
c. Inexact
d. None of the above
4. Scientific principles are based on ?
a. Hypothesis
b. Theoretical knowledge
c. Creativity
d. Experimentation
5. How Management is an Art?

How Management, Science and Art relate to one another.

A. Science
 Systematic Body of knowledge
 Formed on basis of basis of observation and experimentation
 Scientific principles are valid and applicable universally
Management as a Science
 a systematized body of knowledge – own theories, concepts and principles
 Inexact science – have evolved over a period based on repeated
experimentation and observation in different types of organizations.
 Principles are modified according to a given situation.

B. Art
 Existence of Theoretical Concepts

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  Personalized Application
 Based on Practice and Creativity

Management as an Art
 Takes care of all the management process within an organization with the
help of knowledge gained from study and practice of theoretical
concepts.
 There exist a plethora of management strategies and theories profound by
fathers of management and used by manager to handle various situations.
 Each manager has their style of management

Management Science
is the application of a scientific approach to solving management problems in
order to help managers make better decisions.
Recognized and established discipline in business industry.
Also known as
 Operations Research, Quantitative method, Quantitative Analysis,
and Decision Sciences.

Evolution of Management (Quick Review)

Pre-Historic Era
Industrial Revolution
Problems encountered
Scientific Management Theory
Contributors:
A. Frederick W Taylor (1856-1915) – the father of Scientific Management and
published the “Principles of Scientific Management”
B. Frank (1868-1924) and Lillian Gilbert (1878-1972)
C. Henry L. Gantt (1861-1919)

Classical Organization Theory

Contributors:
A. Henri Fayol (1841–1925)
B. Max Webber (1864-1920)
C. Chester Barnard (1886-1961)

Acceptance Theory of Authority

Human Relation Approach/ Behavioral Theory
Contributors:
A. Elton Mayo
B. Abraham Maslow

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 C. Douglas McGregor
D. Hertzberg
Quantitative Approach Management Science Approach
System Approaches
Contingency Approach
Total Quality Management

This Approach are:

 Observation
 Definition of Problem
 Model Construction
 Model Solution
 Implementation of solution results

A. OBSERVATION
 The system must be continuously and closely observed so that problems
can be identified as soon as they occur.
 The person who normally identifies a problem is the manager because
managers work in places where problems might occur.

Management Scientist
Person skilled in techniques of management science and trained to
identify problems.
Hired specifically to solve problems using management science
techniques.

B. DEFINITION OF THE PROBLEM

 the problem must be clearly and concisely defined.
 the limits of the problem and the degree to which it pervades other units of
the organization must be included in the problem definition.
 Because the existence of a problem implies that the objectives of the firm
are not being met in some way, the goals (or objectives) of

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  the organization must also be clearly defined. A stated objective helps to
focus attention on what the problem is.
C. MODEL CONSTRUCTION
Model
Abstract representation of an existing problem situation.
Form or graph or chart and mathematical relationship.

Illustration A:
Asta Company sells a product. The product cost is P5.00 and selling price is P20.00.
Model: Z = P20x – P5x
Where:
X = number of units of the product
Z = represents the total profit that results from the sale of the product

Variables ( x and y )
→ symbol used to represent an item that can take on any value.
Z is a dependent variable → its value depends on the number units sold
X is a independent variable → number of units sold is not depended on
anything
Parameter
→ constant values that are generally coefficients of the variables in an
equation.
Data
→ pieces of information from a problem environment.
Ex. Selling price of P20 and P5.
Functional Relationship
→ a model that includes variables, parameter and equations

Additional information from the previous illustration A:

The product is made from steel and that the business firm has 100 pounds of steel
available. It takes 4 pounds of steel to make each unit of the product. A new
mathematical relationship is develop:

4x = 100 lb of steel

Now our model consists of two relationships:

Z = P20x – P5x
4x = 100 lb of steel

Objective Function
→ a means to maximize (or minimize) something. This something is a
numeric value.

Constraint
→ are the restrictions or limitations on the decision variables

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 To signify this distinction between the two relationships in this model, we will
add the following notations:
maximize Z = P20x – P5x
subject to
4x = 100 lb of steel

D. MODEL SOLUTION
 The actual solving of the problem.
Using the model in the previous:
maximize Z = P20x – P5x
subject to
4x = 100 lb of steel
Use simple Algebra. Solve for x
4x = 100
X = 100/4
X = 25 units

Substitute the value of x.

Z = P20x – P5x
= P20(25) – P5(25)
= P375
Thus, if the manager decides to produce 25 units of the product and all 25
units sell, the business firm will receive P375 in profit.

E. Implementation
→ the actual use of model once it is developed or the solution to the problem the
model was developed to solve.

 Also called the Profit Analysis

 Management science models can be solved – mathematically, graphically
and computer

Purpose
To determine the number of units of a product to sell of produce that will equate
the total revenue to total cost.

Components of Break-even analysis

Volume → level of sales or production by a company. Expressed as the
number of units produced, and sold or as a dollar volume of sales or a
percentage of total capacity available.
Fixed cost → are generally independent of the volume of units produced
and sold. That is, fixed costs remain constant, regardless of how many units
of product are produced within a given range.
Variable cost → determined on a per-unit basis. Thus, total variable costs
depend on the

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 number of units produced.
Total variable costs are a function of the volume and the variable cost per
unit. This
relationship can be expressed mathematically as
Total variable cost = Vx
Where: V = variable cost per unit and x = volume (number of units) sold.

The total cost of an operation is computed by summing total fixed cost and total
variable
cost, as follows:
total cost = total fixed cost + total variable cost
or TC = F + Vx
where F = fixed cost

Illustration B:
Levi Clothing Company, which produces denim jeans, occurs the following
monthly sales:
Fixed cost = P10,000 and Variable cost = P8 per pair and arbitrarily the sales was
equals to 400 pairs of denim jeans.
TC = F + Vx
= P10,000 + (8)(P400)
= P13,200

Profit → difference between total revenue and total cost.

Total Revenue = SPx
Where:
SP = Selling Price
X = units sold
For our Levi Company, the denim jeans sell for P23 per pair and we sell sell 400 pairs
per month, then the total monthly revenue is
Total Revenue = SPx
= P23(400)
= P9,200
The whole problem can now be computed as follows:
Total Profit = Total Revenue – Total Cost
Z = SPx – (F + Vx)
Z = SPx – F - Vx

Can now be solved as:

Z = SPx – F - Vx
Z = 9,200 + 13,200
Z = (P4,000)
Break-even Point → total revenue equals total cost, thus, the profit is zero.
Let profit be Zero.
Z = SPx – F - Vx
0 = 23x – 10,000 – 8x
15x = 10,000
X = 666.7 pairs of jeans

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Or derived the formula for easy computation:
Break-even point = F / SP – V
= 10,000 / 23 – 8
= 666.7 pairs of jeans

Break-even Point
50
Revenue, Cost and Profit

40

30

20

10

0
200 400 600 800 1000 1200 1400 1600
Volume

Total Revenue Fixed Cost Total Cost

To see how sensitive a management model is to changes.

Illustration C:
Using the previous given and using the formula for break-even point
 An increase in Selling price
From P23 to P30.
BP = F / CM*
*CM = Contribution margin = Selling price – variable cost
BP = F / CM
= 10,000 / (30-8)
= 10,000 / 22
= 454.5 pairs of

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 Break-even Point
20
Revenue, Cost and Profit

10

0
200 400 600 800
Volume
Total Revenue Fixed Cost Total Cost New Total Revenue

 An increase in Variable cost/expenses to offset the potential loss of sales due to

increase in price.
 From Variable cost of P8 increased by P4
BP = F / CM
BP = 10,000 / (30-12)
= 10,000 / 18
= 555.5 pairs of jeans

 An increase in fixed cost/expenses

 From Fixed cost of P10,000 increased to P13,000
BP = F / CM
BP = 13,000 / (30-12)
= 13,000 / 18
= 722.2 pairs of jeans

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Introduction to Management Science by Taylor

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