BSBI524 QUANTITATIVE METHODS 1

INTRODUCTION TO QUANTITATIVE METHOD AND

MATHEMATICAL MODELLING 2

Module 2. INTRODUCTION TO QUANTITATIVE METHOD

AND MATHEMATICAL MODELLING 2
Week No :2
Duration : 3 hrs

Now that we have an overview of the concept of quantitative method and the
problem solving process, the next step is to gain deeper understanding of its primary tool –
mathematical models. This section seeks to explore the use of mathematical models in
decision making particularly on how managers translate real world problems into a
mathematical equation. At the end of the end of this module, the learners are expected to;

C1. Demonstrate advanced knowledge and understanding of the different concepts,

theories, quantitative tools and techniques in business and decision-making
processes;

C3. Apply various business decision models and interpret derived results;

TOPIC 1. MODELS IN PROBLEM SOLVING PROCESS

In the previous module, we identified that there are four stages in tackling a problem
– identifying the problem, analyzing it, making decisions and implementing the results. Of
the four stages, mathematical modeling more likely falls under the analysis stage. To recall,
the analysis stage often involve steps to ensure that managers have a clear understanding of
their options and the possible consequences of each of the option. The later part usually is
where models, in general, prove the highest value. While businesses could do trial and error,
or sometimes referred to as experiments, such practice provides some glaring
disadvantages.

Course Module – BSBI524 Quantitative Method By: MPDoblas

 The following are some of the major advantages of mathematical models over
experimentation (in real life situation) in business decisions;

1) requires less time

2) is less expensive
3) Involves less risk.

“Quantitative methods” is a broad subject that includes many different approaches –

but they all start with a model of a problem. In this sense, a ‘model’ is a simplified
representation of reality, and we are not talking about toys or games. The main features of a
model are;

 It is a representation of reality Key Term

 It is simplified, with only relevant details included Models - are
representations of real
 Properties in reality are represented by other properties objects or situations.
in the model.

While managers often use mathematical models in making management decisions, it is

important to be familiar with the three common forms of models;

 Iconic models are physical replicas (scalar representations) of real objects.

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INTRODUCTION TO QUANTITATIVE METHOD AND
MATHEMATICAL MODELLING 2

 Analog models are physical in form, but do not physically resemble the object being
modeled.

 Mathematical models represent real world problems through a system of

mathematical formulas and expressions based on key assumptions, estimates, or
statistical analyses. Examples of mathematical models usually used in business and
management are;
Sales = Unit Selling Price x Number of Units sold
Profit = Revenue - Expenses
VAT = Rate x Sales

C1. Demonstrate advanced knowledge and understanding of the different concepts,

theories, quantitative tools and techniques in business and decision-making processes;

3. What are the benefits of advantages of quantitative methods?

Review Questions
1. Why are mathematical models better than conducting real life experiment in
business?
2. What are the forms of models and how do they differ from each other?

Course Module – BSBI524 Quantitative Method By: MPDoblas

TOPIC 2. BUILDING MATHEMATICAL MODELS
It may be obvious by now that this course will focus on creating and using
mathematical models to aid management decision making. In this section we will look at
how mathematical models are built and how do they apply in real life business cases.

Let’s recall the example of a mathematical model provided earlier;

Equation 1: Profit = Revenue - Expenses

In many cases, we can express revenues as price per unit multiplied times the
number of units sold. Expenses can often be determined by summing fixed costs and
variable cost. Variable cost is often expressed as variable cost per unit multiplied times
the number of units. Thus, we can also express profit in the following mathematical
model:

Equation 2: Profit = Revenue - (Fixed cost + Variable cost)

Profit = (Selling price per unit x Number of units sold) –
[(Fixed cost) + (Variable cost per unit x Number of units sold)]

Thus, if we denote;

s = selling price
f = fixed cost
v = variable cost per unit
X = number of unit sold

Then we will have;

Equation 3: Profit = (sX) – [(f )+ (vX)]

or Profit = sX – f - vX

The parameters in this model are s, f, v, as these are inputs that are inherent in the
model. The number of units sold (X) is the decision variable of interest. A parameter is a
measurable quantity that is inherent in the problem. The cost of producing one unit of good
is an example of a parameter. On the other hand, variable, as the name implies, is a
measurable quantity that may vary or is subject to change. Variables can be controllable or
uncontrollable. A controllable variable is also called a decision variable. In most cases,
 BSBI524 QUANTITATIVE METHODS 5
INTRODUCTION TO QUANTITATIVE METHOD AND
MATHEMATICAL MODELLING 2

parameters are fixed and thus more often referred to as the

Key Terms uncontrollable variable while decision variables are the

Parameter – A measurable controllable variables since these are the values we usually
input quantity that is adjust to obtain an optimal solution. The values of the
inherent in a problem.
decision variables that provide the mathematically-best
Variable – A measurable
output are referred to as the optimal solution for the
quantity that is subject to
change. model.

Optimal Solution - The

EXAMPLE: Fatema’s company, F time pieces, buys, sells, and
values of the decision
variables that provide the repairs old clocks and clock parts. Fatema sells rebuilt
mathematically-best
springs for a price per unit of BD 10. The fixed cost of the
output
equipment to build the springs is BD 1,000. The variable cost
per unit is BD 5 for spring material. In this example;

Parameters (uncontrollable variables)

s = 10
f = 1,000
v=5

The point of interest (decision variable or controllable variable) is the number of

springs sold (X). Thus, the mathematical model to represent profit for F time pieces would
be;

Profit = 10X – 1,000 – 5X

If sales are 0, Fatema will realize a BD 1,000 loss. If sales are 1,000 units, she will
realize a profit of BD 4,000;

Profit = (10 x 1,000) – 1,000 – (5 x 1,000)

Profit = 4,000

In this case, you can already determine the several l of profit given different level of
activity (units sold). This model is particularly important especially in planning the

Course Module – BSBI524 Quantitative Method By: MPDoblas

resources needed and the level of activity required to break-even. Break-even point (BEP) is
the number of units sold that will result in BD 0 profits - no loss no profit. Using the model
we developed, we can compute the BEP for F time pieces. Since BEP means profit is equal to
0 and our point of interest is the number of units sold that will result to 0 profit, we can
write the model as such;

Profit = sX – f – vX
0= 10X – 1,000 – 5X
-10X + 5X = - 1,000 – 0 (combining like terms)
- 5X = - 1,000 (perform the operations)
- 5X = - 1,000
-5
X = 200 units ; BEP = 200 units

To check;

0= (10)(200) – 1,000 – 5(200)

0= 2,000 – 1,000 – 1,000
0= 0

The BEP is very important information for managers. The result suggests that any
level of activity that would create a number of units sold lesser than 200 will result to a loss
while any level of activity generating more than 200 units will result to a profit.

Mathematical Models Categorized by Risk

Some mathematical models, like the profit and break-even models previously
discussed, do not involve risk or chance. We assume that we know all values used in the
model with complete certainty. These are called deterministic models. A company, for
example, might want to minimize manufacturing costs while maintaining a certain quality
level. If we know all these values with certainty, the model is deterministic.
Other models involve risk or chance. For example, the market for a new product
might be “good” with a chance of 60% (a probability of 0.6) or “not good” with a chance of
40% (a probability of 0.4). Models that involve chance or risk, often measured as a
probability value, are called probabilistic models. For this course we will explore both
types of models.
 BSBI524 QUANTITATIVE METHODS 7
INTRODUCTION TO QUANTITATIVE METHOD AND
MATHEMATICAL MODELLING 2

Computer Aided Solutions in Modeling

Developing a solution, testing the solution, and analyzing the results are important steps in
the quantitative analysis approach. Because we will be using mathematical models, these
steps require mathematical calculations. Fortunately, we can use the computer to make
these steps easier. There are two programs that are generally accessible MS Windows
Operating Systems that can aid in this process.
1. POM-QM for Windows is an easy-to-use decision support system that was developed
for use with production/operations management (POM) and quantitative methods or
quantitative management (QM) courses. POM for Windows and QM for Windows
were originally separate software packages for each type of course. These are now
combined into one program called POM-QM for Windows.
2. Excel QM, which can also be used to solve many of the problems discussed in this
book, works automatically within Excel spreadsheets. Excel QM makes using a
spreadsheet even easier by providing custom menus and solution procedures that
guide you through every step.

Formative Assessment 2

C1. Demonstrate advanced knowledge and understanding of the different concepts,

theories, quantitative tools and techniques in business and decision-making processes;

4. What are the benefits of advantages of quantitative methods?

Part 1. Short Answers

1. What is the difference deterministic model and probabilistic model? (5 marks)
2. Give some examples of various types of models. What is a mathematical model?
Develop two examples of mathematical models. (5 marks)

Course Module – BSBI524 Quantitative Method By: MPDoblas

Scoring Rubric for Essay
Content (2) Organization (1.5) Development (1) Use of Language (0.5)

Answer is appropriate to the Clear sense of order. Begins with a Develops each point with may specific Uses technical or scientific terminology
question. Content is factually thesis or topic sentence. Supporting details. appropriately and correctly. No major
correct. points are presented in a logical Answers question completely. grammatical or spelling errors.
progression.
Answer is appropriate to the May lack a thesis sentence, but points Each point supported with some details Accurate word choice. No more than 2
question. Content may have one or are presented in a logical progression. and evidence. major errors and a few minor errors.
two factual errors. All important points
included.
Content relates peripherally to the Logic of argument is minimally Sparse details or evidence. Question Ordinary word choice; use of scientific
question; contains significant only partially answered. terminology avoided. Some serious
factual errors. perceivable. Points presented in a errors (but they don’t impair
seemingly random fashion, but all communication).
support argument.
Content unrelated to question. Lacks clear organizational plan. Reader Statements are unsupported by any Limited vocabulary; errors impair
is confused. detail or explanation. Repetitious, communication.
incoherent, illogical development.

Part 2. Problem Solving

Instruction: In each of the problem, provide what is asked.

C3. Apply various business decision models and interpret derived results

1. Ahmed Masood has started his own company, Masood Shirts, which manufactures
imprinted shirts for special occasions. Since he has just begun this operation, he rents
the equipment from a local printing shop when necessary. The cost of using the
equipment is BD 350. The materials used in one shirt cost BD 8, and Ahmed can sell
these for BD 15 each.

Requirements;

a) Identify the parameters of the problem (1 mark each parameter)

b) Create the mathematical model that represents the problem (5 marks)

5 pts Complete components of the graph/mathematical model
4 pts graph/mathematical model lacks minor details/component
3 pts The graph/mathematical model lacks moderate number of components
2 pts The graph/mathematical model lacks major number of components
1 pt Only 1 component of the graph/mathematical model is appropriately identified

c) If Ahmed sells 20 shirts, what would be the profit? (3 marks correct solution + 2 marks
correct assignment = 5 marks)
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INTRODUCTION TO QUANTITATIVE METHOD AND
MATHEMATICAL MODELLING 2

d) How many shirts must Gina sell to break even? (3 marks correct solution + 2 marks
correct assignment = 5 marks)

2. Andrews Maquiling sells handcrafted yard decorations at county fairs. The variable
cost to make these is $20 each, and he sells them for $50. The cost to rent a booth at
the fair is $150.

Requirements;

a) Identify the parameters of the problem (1 mark each parameter)

b) Create the mathematical model that represents the problem (5 marks)

5 pts Complete components of the graph/mathematical model
4 pts graph/mathematical model lacks minor details/component
3 pts The graph/mathematical model lacks moderate number of components
2 pts The graph/mathematical model lacks major number of components
1 pt Only 1 component of the graph/mathematical model is appropriately identified

c) How many units must Andrews sell to break even? (3 marks correct solution + 2
marks correct assignment = 5 marks)

3. A couple of entrepreneurial business students at AMA University decided to put their

education into practice by developing a tutoring company for business students.
While private tutoring was offered, it was determined that group tutoring before tests
in the large statistics classes would be most beneficial. The students rented a room
close to campus for BD 300 for 3 hours. They developed handouts based on past tests,
and these handouts (including color graphs) cost BD 5 each. The tutor was paid BD 25
per hour, for a total of BD 75 for each tutoring session.

Course Module – BSBI524 Quantitative Method By: MPDoblas

Requirements;

a) If students are charged BD 20 to attend the session, how many students must enroll
for the company to break even? (3 marks correct solution + 2 marks correct
assignment = 5 marks)

b) A somewhat smaller room is available for BD 200 for 3 hours. The company is
considering this possibility. How would this affect the break-even point? (5 marks)
5 pts the explanations is correct and is done clearly with supporting calculations.
4 pts the explanation is correct but lacks calculations
3 pts the explanation is correct but not properly discussed
2 pts the explanation is poorly discussed and computations are not complete
1 pt Wrong explanation

References and Supplementary Materials

Books and Journals
1. Render, B., Stair Jr, R. M., & Hanna, M. E. (2012). Quantitative Analysis for
Management (11th Ed.)
2. Waters, D., & Waters, C. D. J. (2017). Quantitative methods for business. Pearson
Education.
3. Wisniewski, M. (2010). Quantitative Methods for Decision Makers with Mathxl.
Pearson Education.

Online Supplementary Reading Materials

1. http://www.jhumanities.net/article_59559_aa75c8e94dbd02eea0f3a53ee16bc29
8.pdf

Online Instructional Videos

1. https://www.youtube.com/watch?v=PH6E6DgCxqw