Introduction

Ironworks

• Iron Works, Inc. manufactures two products

made from steel and just received this month's
allocation of b pounds of steel.
• It takes a1 pounds of steel to make a unit of
product 1 and a2 pounds of steel to make a unit
of product 2.
• Let x1 and x2 denote this month's production
level of product 1 and product 2, respectively.
Ironworks

• Iron Works has a contract calling for at least m

units of product 1 this month.
• The firm's facilities are such that at most u units
of product 2 may be produced monthly.
Solution

– Total Monthly Profit =

– (profit per unit of product 1) x (monthly
production of product 1) + (profit per unit of
product 2) x (monthly production of product 2)

– Total Monthly Profit = p1x1 + p2x2

– We want to maximize total monthly profit:
Max p1x1 + p2x2
Solution

– The total amount of steel used during monthly

production equals:
(steel required per unit of product 1) x (monthly
production of product 1) +
(steel required per unit of product 2) x (monthly
production of product 2)
a1x1 + a2x2
Solution

– This quantity must be less than or equal to the

allocated b pounds of steel:
a1x1 + a2x2 < b
Solution

– The monthly production level of product 1 must

be greater than or equal to m :
x1 > m
– The monthly production level of product 2 must
be less than or equal to u :
x2 < u
Solution

– However, the production level for product 2

cannot be negative:
x2 > 0
Model Summary
Max p1x1 + p2x2 Constraints
s.t. a1x1 + a2x2 < b
Objective
Function x1 > m
x2 < u
x2 > 0
“Subject to”
Question

b = 2000 • Rewrite the model

a1 = 2 with these specific
a2 = 3 values for the
uncontrollable inputs.
m = 60
u = 720
p1 = 100
p2 = 200
Answer

• Substituting, the model is:

• Max 100x1 + 200x2
• s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
Question

• The optimal solution to the current model is

x1 = 60 and x2 = 626 2/3.

• If the product were engines, explain why this is

not a true optimal solution for the "real-life"
problem.
Answer

• One cannot produce and sell 2/3 of an engine.

• Thus the problem is further restricted by the fact
that both x1 and x2 must be integers.
• They could remain fractions if it is assumed
these fractions are work in progress to be
completed the next month.
Remember This?

Uncontrollable Inputs
(Environmental Factors)

Controllable
Output
Inputs Mathematical
(Projected
(Decision Model
Results)
Variables)
 Uncontrollable Inputs
$100 profit per unit Prod. 1
$200 profit per unit Prod. 2
2 lbs. steel per unit Prod. 1
3 lbs. Steel per unit Prod. 2
2,000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2

60 units Prod. 1 Max 100(60) + 200(626.67) Profit = $131,333.33

626.67 units Prod. 2 s.t. 2(60) + 3(626.67) < 2000 Steel Used = 2,000
60 > 60
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model
Example

• Ponderosa Development Corporation (PDC) is a

small real estate developer that builds only one
style house.
• The selling price of the house is $115,000.
• Land for each house costs $55,000 and lumber,
supplies, and other materials run another
$28,000 per house.
Example

• Total labor costs are approximately $20,000

per house.
• Ponderosa leases office space for $2,000 per
month.
• The cost of supplies, utilities, and leased
equipment runs another $3,000 per month.
Example

• The one salesperson of PDC is paid a

commission of $2,000 on the sale of each
house.
• PDC has seven permanent office employees
whose monthly salaries are given on the next
slide.
Salary Breakdown
Employees Salary
President $10,000
VP, Development 6,000
VP, Marketing 4,500
Project Manager 5,500
Controller 4,000
Office Manager 3,000
Receptionist 2,000
Question

1. Identify all costs

2. Denote the marginal cost and marginal
revenue for each house.
Answer

• The monthly salaries total $35,000

• The monthly office lease and supply costs total
another $5,000.
• This $40,000 is a monthly fixed cost.

• The total cost of land, material, labor, and sales

commission per house, $105,000, is the
marginal cost for a house.
Answer

• The selling price of $115,000 is the marginal

revenue per house.
Question

• Write the monthly

1. cost function c(x), plug a value for x into a
formula for cost
2. revenue function r(x), plug a value for x into
a formula for revenue
3. profit function p(x), plug a value for x into a
formula for profit
Answer

c(x) = variable cost + fixed cost

c(x) = 105,000x + 40,000
r(x) = 115,000x
p(x) = r(x) - c(x)
p(x) = 115,000x – (105,000x + 40,000)
p(x) = 115,000x – 105,000x – 40,000
p(x) = 10,000x - 40,000
Question

• What is the breakeven point for monthly sales

of the houses?
Answer

BEP = Profit = 0
r(x) = c(x)
115,000x = 105,000x + 40,000
Solving x = 4
Question

• What is the monthly profit if 12 houses per

month are built and sold?
Answer

p(12) = 10,000(12) - 40,000

$80,000 monthly profit
Graph
1200
Total Revenue =
Thousands of Dollars

1000 115,000x

800
600
Total Cost =
400 40,000 + 105,000x

200
Break-Even Point = 4 Houses
0
0 1 2 3 4 5 6 7 8 9 10
Number of Houses Sold (x)
Using Excel for Breakeven
Analysis
• A spreadsheet software package such as
Microsoft Excel can be used to perform a
quantitative analysis of Ponderosa Development
Corporation.
• We will enter the problem data in the top portion
of the spreadsheet.
• The bottom of the spreadsheet will be used for
model development.
Formula Spreadsheet
A B
1 PROBLEM DATA
2 Fixed Cost $40,000
3 Variable Cost Per Unit $105,000
4 Selling Price Per Unit $115,000
5 MODEL
6 Sales Volume
7 Total Revenue =B4*B6
8 Total Cost =B2+B3*B6
9 Total Profit (Loss) =B7-B8
Question

• What is the monthly profit if 12 houses are built

and sold per month?
Spreadsheet Solution
A B
1 PROBLEM DATA
2 Fixed Cost $40,000
3 Variable Cost Per Unit $105,000
4 Selling Price Per Unit $115,000
5 MODEL
6 Sales Volume 12
7 Total Revenue $1,380,000
8 Total Cost $1,300,000
9 Total Profit (Loss) $80,000
QM

• QM for Windows
• An easy to use decision support system for use
in Operations Management and Quantitative
Analysis courses
• This is the main menu of quantitative models
Excel QM’s Main Menu (2010)

• Works automatically within Excel spreadsheets

Question

• What is the breakeven point for monthly sales

of the houses?
Selecting Break-Even Analysis
in Excel QM
Break-Even Analysis in QM
Spreadsheet Solution

• Another way to determine the break-even

point using a spreadsheet is to use the Goal
Seek tool.
• Microsoft Excel‘s Goal Seek tool allows the
user to determine the value for an input cell
that will cause the output cell to equal some
specified value.
Using Goal Seek
Spreadsheet Solution

• In our case, the goal is to set Total Profit to

zero by seeking an appropriate value for Sales
Volume.
Spreadsheet Solution: Goal
Seek Approach
• Step 1: Select the Tools menu
• Step 2: Choose the Goal Seek option
• Step 3: When the Goal Seek dialog box
appears:
– Enter B9 in the Set cell box
– Enter 0 in the To value box
– Enter B6 in the By changing cell box
– Click OK
Spreadsheet Solution: Goal
Seek Approach
• Completed Goal Seek Dialog Box
Spreadsheet Solution: Goal
Seek Approach
• Completed Goal Seek Dialog Box
A B
1 PROBLEM DATA
2 Fixed Cost $40,000
3 Variable Cost Per Unit $105,000
4 Selling Price Per Unit $115,000
5 MODEL
6 Sales Volume 4
7 Total Revenue $460,000
8 Total Cost $460,000
9 Total Profit (Loss) $0
Quantitative Methods in
Practice
• Linear Programming • Goal Programming
• Integer Linear • Analytic Hierarchy
Programming Process
• PERT/CPM • Forecasting
• Inventory Models • Markov-Process
• Waiting Line Models Models
• Simulation • Dynamic
• Decision Analysis Programming
Linear Programming

• A problem-solving approach developed for

situations involving maximizing or minimizing a
linear function subject to linear constraints that
limit the degree to which the objective can be
pursued.
Integer Linear Programming

• An approach used for problems that can be

set up as linear programs with the additional
requirement that some or all of the decision
recommendations be integer values.
Project Scheduling

• PERT (Program Evaluation and Review

Technique)
• CPM (Critical Path Method)
• Planning, scheduling, and controlling projects
that consist of numerous separate jobs or tasks
performed by a variety of departments,
individuals, and so forth.
Inventory Models

• Are used by managers faced with the dual

problems of maintaining sufficient inventories to
meet demand for goods and, at the same time,
incurring the lowest possible inventory holding
costs.
Waiting Line Models

• Help managers understand and make better

decisions concerning the operation of systems
involving waiting lines.
Simulation

• A technique used to model the operation of a

system.
• This technique employs a computer program to
model the operation and perform simulation
computations.
Decision Analysis

• Can be used to determine optimal strategies in

situations involving several decision alternatives
and an uncertain or risk-filled pattern of future
events.
Goal Programming

• A technique for solving multi-criteria decision

problems, usually within the framework of linear
programming.
Analytic Hierarchy Process

• A multi-criteria decision-making technique that

permits the inclusion of subjective factors in
arriving at a recommended decision.
Forecasting Methods

• Are techniques that can be used to predict

future aspects of a business operation.
Markov-Process Methods

• Are useful in studying the evolution of certain

systems over repeated trials (such as describing
the probability that a machine, functioning in
one period, will function or break down in
another period).
Methods Used Frequently

1. Linear programming
2. Decision Analysis
3. Network models (such as transportation and
transshipment models)
4. Forecasting
The Management Scientist
Software
12 Modules
POSSIBLE PROBLEMS IN THE
QUANTITATIVE ANALYSIS
APPROACH
Defining the Problem

• Problems may not be easily identified.

• There may be conflicting viewpoints
• There may be an impact on other departments.
• Beginning assumptions may lead to a particular
conclusion.
• The solution may be outdated.
Developing a Model

• Manager’s perception may not fit a textbook

model.
• There is a trade-off between complexity and
ease of understanding.
Acquiring Accurate Input Data

• Accounting data may not be collected for

quantitative problems.
• The validity of the data may be suspect.
Developing an Appropriate
Solution
• The mathematics may be hard to understand.
• Having only one answer may be limiting.
Other Problems

• Testing the solution for validity

• Analyzing the results in terms of the whole
organization
Implementation –
Not Just the Final Step
• There may be an institutional lack of
commitment and resistance to change.
• Management may fear the use of formal
analysis processes will reduce their decision-
making power.
• Action-oriented managers may want “quick
and dirty” techniques.
Implementation –
Not Just the Final Step
• Management support and user involvement are
important.
• There may be a lack of commitment by
quantitative analysts.
• Analysts should be involved with the problem
and care about the solution.
• Analysts should work with users and take their
feelings into account.