INTRODUCTION TO BUSINESS ANALYTICS:

Introduction:
Analytics is the scientific process of discovering and communicating the
meaningful patterns which can be found in data. Data management, data
visualization, predictive modeling, data mining, forecasting simulation,
and optimization are some of the tools used to create insights from data.
The word analytics has come into the foreground in last decade or so. The
increase of the internet and information technology has made analytics
very relevant in the current age.
Business Analytics:
Business analytics (BA) is a set of disciplines and technologies for solving
business problems using data analysis, statistical models and other
quantitative methods. It involves an iterative, methodical exploration of an
organization's data, with an emphasis on statistical analysis, to drive
decision-making.
Business analytics is the process of transforming data into insights to
improve business decisions.
while business analytics leans heavily on statistical, quantitative, and
operational analysis, developing data visualizations to present your
findings and shape business decisions is the end result.
business analytics involves a combination of the following:
1. identifying new patterns and relationships with data mining;
2. forecasting future business needs, performance, and industry trends
with predictive modeling; and communicating your findings in easy-
to-digest reports to colleagues, management, and customers.
3. conducting multi-variable testing based on findings;
4. using quantitative and statistical analysis to design business models;

Evolution of Business Analytics:

1. Business analytics has been existence since very long time and has
evolved with availability of newer and better technologies. It has its
roots in operations research, which was extensively used during
World War II.(1940’s)
2. Analytics and visualizations have been used throughout history
without the support of computers and software. This was done by
manually plotting graphs using statistical methods and manually
recording data. This was quite different from the business analytics
that we recognize and know about.
3. Operations research was an analytical way to look at data to conduct
military operations. Over a period of time, this technique started
getting utilized for business. Here operation’s research evolved into
management science. Again, basis for management science remained
same as operation research in data, decision making models, etc.
4. Analytics have been used in business since the management
exercises were put into place by Frederick Winslow Taylor in the
late 19th century.
5. In 1956, IBM introduced the first hard disk drive that allowed users
to store data that can be used for business or corporate purposes.
6. During the 1970s, Bill Inmon started discussing the concept of a data
warehouse to solve the problem of storing vast amounts of data for
business intelligence.
7. During the 1980s, the first business data warehouse was developed
by IBM researchers Barry Devlin and Paul Murphy.
8. In this period between the 1990s and early 2000s, various solutions
and software were introduced, such as business intelligence tools by
companies like SAP, Microsoft, SAS and IBM alongside relational
databases.
9. After the early 2000s, common people started using data more
proactively for personal purposes. This also led to more corporate
use of data through employees extensively using organizational data.
More tools were also introduced during this time with which
individuals can use business intelligence tools without extensive
training. Eventually, Google Analytics was introduced that allowed
website owners to analyze statistics about their website, such as
trends in website visits.
 10. After 2010, business intelligence and analytics truly took off,
being adopted worldwide by companies and businesses around the
world. This also pushed us to an era of cloud computing and
extensive use of Artificial Intelligence or automation.
11. The recent evolution that business analytics has experienced
can be fundamentally traced back to the introduction of automation
in analytics and the concept of big data.
There have been four main spheres where business analytics has
evolved greatly, these are:
 Artificial Intelligence and Automated Analytics
 Predictive Analytics
 Real-time Analytics
 Big Data
A Visual prospect of Modern Business Analytics:
Scope/Application of Business Analytics:
1. Pricing:
setting prices for consumer and industrial goods, government
contracts, and maintenance contracts
2. Customer segmentation:
identifying and targeting key customer groups in retail, insurance,
and credit card industries
3. Merchandising:
determining brands to buy, quantities, and allocations
4. Location:
finding the best location for bank branches and ATMs, or where to
service industrial equipment
5. Social Media
understand trends and customer perceptions; assist marketing
managers and product designers
How business analytics works:
Before any data analysis takes place, BA starts with several foundational
processes:
 Determine the business goal of the analysis.
 Select an analysis methodology.
 Get business data to support the analysis, often from various systems
and sources.
 Cleanse and integrate data into a single repository, such as a data
warehouse or data mart.
.
Need/Importance of Business Analytics:
 Business analytics is a methodology or tool to make a sound
commercial decision.
 Hence it impacts functioning of the whole organization.
Therefore, business analytics can help improve profitability of
the business, increase market share and revenue and provide
better return to a shareholder.
 Facilitates better understanding of available primary and
secondary data, which again affect operational efficiency of
several departments.
  Provides a competitive advantage to companies. In this digital
age flow of information is almost equal to all the players. It is
how this information is utilized to makes the company
competitive. Business analytics combines available data with
various well thought models to improve business decisions.
 Converts available data into valuable information. This
information can be presented in any required format, comfortable
to the decision maker

Essential of Business Analytics:

Business analytics has many use cases, but when it comes to commercial
organizations, BA is typically used to:
1. Analyze data from a variety of sources. This could be anything from
cloud applications to marketing automation tools.
2. Use advanced analytics and statistics to find patterns within datasets.
These patterns can help you predict trends in the future and access
new insights about the consumer and their behavior.
3. Support decisions based on the most current information. With BA
providing such a vast amount of data that you can use to back up
your decisions, you can be sure that you are fully informed for not
one, but several different scenarios.
Benefits of implementing BA in your organization
Apart from having applications in various arenas, following are the
benefits of Business Analytics and its impact on business:
1. Accurately transferring information
2. Consequent improvement in efficiency
3. Help portray Future Challenges
4. Make Strategic decisions
5. As a perfect blend of data science and analytics
6. Reduction in Costs
7. Improved Decisions
8. Share information with a larger audience
9. Ease in Sharing information with stakeholders
Challenges to implement BA:
1. Lack of technical skills in employees
2. Fuss over acceptance of BA by staff
3. Data Security and Maintenance
4. Integrity of Data
5. Delivering relevant information in the given time
6. Inability to address complex issues
7. Costs involved in implementing BA
8. Investment of staff time in implementation of BA
9. Lack of a proper strategy to implement BA

Process of Business Analytics:

Application of BA:
Business analytics has a wide range of application from customer
relationship management, financial management, and marketing, supply-
chain management, human resource management, pricing and even in
sports through team game strategies.
Business analytics begin with the collection, organization, and
manipulation of data and is supported by three major components:
1.Descriptive analytics:
It summarizes an organization’s existing data to understand what has
happened in the past or is happening currently. Descriptive Analytics is the
simplest form of analytics as it employs data aggregation and mining
techniques. It makes data more accessible to members of an organization
such as the investors, shareholders, marketing executives, and sales
managers.
Most business starts with descriptive analytics – the use of data to
understand past and current business performance and make informed
decision. Descriptive analytics is the most commonly used and most well
understood type analytics. These techniques categorize, characterize,
consolidate, and classify data to convert them into useful information for
the purpose of understanding and analyzing business performance.
Descriptive analytics gains insight from historical data with reporting
scorecards, clustering’s etc.
Descriptive analytics helps to answer questions such as:
1. “How much did we sell in reach region?”
2. “How many and what type of complaints did we resolve?”
3. “What was our revenue and profit last quarter?”

2. Predictive analytics:
This type of Analytics is used to forecast the possibility of a future event
with the help of statistical models and ML techniques. It builds on the
result of descriptive analytics to devise models to extrapolate the
likelihood of items. To run predictive analysis, Machine Learning experts
are employed. They can achieve a higher level of accuracy than by
business intelligence alone.
Predictive analytics employs predictive modelling using statistical and
machine learning techniques.
Predictive analytics seeks to predict the future by examining historical
data, detecting pattern or relationships in these data and then extrapolating
these relationships forward in time.
Predictive analytics can predict risk and find relationships in data not
readily apparent with traditional analyses. Using advance techniques
predictive analytics can help to detect hidden pattern in large data.
Predictive analytics helps to answer questions such as:
1. What will happen if demand falls by 10% or if supplier prices go up
by 5%?”
2. What do we expect to pay for fuel over next several months?”
3. What is the risk of losing money in a new business venture?”

3.Prescriptive analytics:
Going a step beyond predictive analytics, it provides recommendations for
the next best action to be taken. It suggests all favourable outcomes
according to a specific course of action and also recommends the specific
actions needed to deliver the most desired result.
It mainly relies on two things, a strong feedback system and a constant
iterative analysis.
It learns the relation between actions and their outcomes. One common use
of this type of analytics is to create recommendation systems.
Prescriptive analytics recommends decision using optimization,
simulation.
Prescriptive analytics uses optimization to identify the best alternative to
minimize or maximize some objective.
Prescriptive analytics addresses questions such as:
1. “How much should be produced to maximize the profit?”
2. “What is the best way of shipping goods from our company to
minimize the cost?”
 Business Question Tools Outcome Focus
Analytics
Descriptive 1. What Data Well defined Uncovering
Analytics Happened? modeling, business pattern that
(hidden sight) 2. What is Business problems or gives insight
Happening reporting, opportunities
? visualization,
Dashboard,
Regression
Predictive 1. What is Data mining, Accurate Identify past
Analytics (In likely to Text Mining, projection of pattern to
sight) happen? Predictive future predict the
2. What will modeling, conditions and future.
happen? Artificial states
3. Why will it Nural
happen Network
(ANN)
Prescriptive 1. What Decision Optimization- Focus on
Analytics should I modeling, Best possible decision
(Automation) do? optimization, Business making and
2. Why simulation, Solution efficiency
should I do expert system
it?

Examples:
1. Retail Markdown Decision:
Most department stores clear seasonal inventory by reducing the
prices.
The question is:
When to reduce the price and by how much?
 Descriptive Analytics:
Examine the historical data for similar products (prices, units
sold, advertising…..)
 Predictive analytics:
Predict sales based on price
 Prescriptive analytics:
Find the best sets of pricing and advertising to maximize the
sales revenue.
 2. Harrah’s Entertainment
One of the most cited examples of the use of analytics in business is
Harrah’s Entertainment. Harrah’s owns numerous hotels and casinos
and uses analytics to support revenue management activities, which
involve selling the right resources to the right customer at the right
price to maximize revenue and profit. The gaming industry views
hotel rooms as incentives or rewards to support casino gaming
activities and revenues, not as revenue-maximizing assets.
Therefore, Harrah’s objective is to set room rates and accept
reservations to maximize the expected gaming profits from
customers.
The question is:
1. How to segment the customers by gaming activities?
2. Forecast demands for rooms
3. Set the prices for the room, allocate the room, offer perks and
reward for the customer
Business analysis vs Business analytics
Business analysis:
Business analysis is the practice of assisting firms in resolving their
technical difficulties by understanding, defining, and solving those issues.
The activities that are carried out while performing Business Analysis:
1. Company analysis: Business analysis aims at figuring out the
requirements of a firm in general and its strategic direction and
determining the initiatives that will enable the business to address
those strategic goals.
2. Requirements planning and management: It focuses on planning
the requirements of the development process, identifying what the
top priority is for execution, and managing the changes.
3. Requirements elicitation: It outlines techniques for collecting
needs from relevant members of the project team.
4. Requirements analysis and documentation: It explains how to
establish and define the needs in detail to allow them to be
effectively carried out by the team.
5. Requirements communication: Business analysis explains methods
to help stakeholders have a shared understanding of the needs and
how they will be carried out.
6. Solution assessment and validation: It also explains how a business
analyst can execute a suggested solution, how to support the execution
of a solution, and how to evaluate possible flaws in the implementation.
Business analytics is also known as data analytics. It is a process of
collecting, evaluating, and drawing valuable outcomes from the
enormous amount of data available.
The aim of business analytics is data and reporting—examining past
business performance and forecasting future business performance. On
the other hand, the business analysis focuses on functions and processes
—determining business requirements and suggesting.

Business Analysis Business Analytics

It mainly aims at the methods and It aims at data and reporting.
determining the business needs.
It is employed to figure out the It is widely practiced to reckon further
organizational needs and possible stats and make decisions to bring
problems to have productive outcomes improvements in the business.
Here, the tasks are carried out by Here, the tasks are carried out by Data
Functional Analysts, Systems Analysts, Scientists and Data Analysts.
and Business Analysts.
Business, functional, and domain skills Mathematical, statistical, and
are needed to perform business analysis. programming skills are needed for
executing business analytics.
The architectural domains for business The architectural domains for business
analysis include enterprise architecture, analytics include data architecture,
technology architecture, and organization technology
architecture.

Business Analytics Tools:

Business Analytics tools help analysts to perform the tasks at hand and
generate reports which may be easy for a layman to understand. These
tools can be obtained from open-source platforms, and enable business
analysts to manage their insights in a comprehensive manner. They tend
to be flexible and user-friendly. Various business analytics tools and
techniques like.
1. Python: It is mainly applied when there is a need for integrating the
data analyzed with a web application or the statistics is to be used in
a database production. The I Python Notebook facilitates and makes
 it easy to work with Python and data. One can share notebooks with
other people without necessarily telling them to install anything
which reduces code organizing overhead.
2. SAS: The tool has a user-friendly GUI and can churn through
terabytes of data with ease. It comes with an extensive
documentation and tutorial base which can help early learners get
started seamlessly.
3. R: is open-source software and is completely free to use making it
easier for individual professionals or students starting out to learn.
Graphical capabilities or data visualization is the strongest forte of R
with R having access to packages like GGPlot, RGIS, Lattice, and
GGVIS among others which provide superior graphical competency.
4. Tableau: is the most popular and advanced data visualization tool in
the market. Story-telling and presenting data insights in a
comprehensive way has become one of the trademarks of a
competent business analyst Tableau is a great platform to develop
customized visualizations in no time, thanks to the drop and drag
features.
5. PowerBI:

Models in Business Analytics:

Model:
1. A model is an abstraction or representation of a real system, idea, or
object.
2. Models capture the most important features of a problem and present
them in a form that is easy to interpret.
3. A model can be as simple as a written or verbal description of some
phenomenon, a visual representation such as a graph or a flowchart,
or a mathematical or spreadsheet representation.
4. Models can be descriptive, predictive, or prescriptive, and therefore
are used in a wide variety of business analytics applications.
5. Models are usually developed from theory or observation and
establish relationships between actions that decision makers might
take and results that they might expect.
Three forms of Model:
Example:
The sales of a new product, such as a first-generation iPad, Android
phone, or 3-D television, often follow a common pattern. We might
represent this in one of three following ways:
1. A simple verbal description of sales might be: The rate of sales
starts small as early adopters begin to evaluate a new product and
then begins to grow at an increasing rate over time as positive
customer feedback spreads. Eventually, the market begins to become
saturated and the rate of sales begins to decrease.
2. Visual Model: A sketch of sales as an S-shaped curve over time, as
shown in Figure, is a visual model that conveys this phenomenon.

3. Mathematical Model: analysts might identify a mathematical model

that characterizes this curve

where S sales, t time, e is the base of natural logarithms, and a, b,

and c are constants.
 the first two forms of the model are purely descriptive; they simply
explain the phenomenon. While the mathematical model also
describes the phenomenon, it can be used to predict sales at a future
time.

Descriptive model:
1. A simple descriptive model is a visual representation called an
influence diagram because it describes how various elements of the
model influence, or relate to, others.
2. An influence diagram is a useful approach for conceptualizing the
structure of a model and can assist in building a mathematical or
spreadsheet model.
3. The elements of the model are represented by circular symbols
called nodes. Arrows called branches connect the nodes and show
which elements influence others.
4. Influence diagrams are quite useful in the early stages of model
building when we need to understand and characterize key
relationships.

Example: An Influence diagram for total cost

From basic business principles, we

know that the total cost of
producing a fixed volume of a
product is comprised of fixed costs
and variable costs. Thus, a simple
influence diagram that shows these
relationships is given in Figure

We can develop a more detailed

model by noting that the variable
cost depends on the unit variable
cost as well as the quantity
produced.
Building a Mathematical Model from an Influence Diagram
We can develop a mathematical model from the influence diagram in First,
we need to specify the precise nature of the relationships among the
various quantities.
For example, we can easily state that
Total Cost = Fixed Cost +Variable Cost …………………(1.1)
Logic also suggests that the variable cost is the unit variable cost times the
quantity produced. Thus,
Variable Cost= Unit Variable Cost * Quantity Produced…(1.2)
By substituting this into equation (1.1), we have
Total Cost= Fixed Cost + Variable Cost
Total Cost=fixed Cost +Unit Variable Cost* Quantity Produced
Using these relationships, we may develop a mathematical representation
by defining symbols for each of these quantities:
TC ==> total cost
V ==>unit variable cost
F ==>fixed cost
Q ==>quantity produced
This results in the model
TC= F+VQ

Decision Model:
A decision model is a logical or mathematical representation of a problem
or business situation that can be used to understand, analyze, or facilitate
making a decision.
Most decision models have three types of input:
1. Data: which are assumed to be constant for purposes of the model.
Some examples would be costs, machine capacities, and intercity
distances.
2. Uncontrollable variables: which are quantities that can change but
cannot be directly controlled by the decision maker. Some examples
would be customer demand, inflation rates, and investment returns.
Often, these variables are uncertain.
3. Decision variables: which are controllable and can be selected at the
discretion of the decision maker. Some examples would be production
quantities, staffing levels, and investment allocations.
Decision models characterize the relationships among the data,
uncontrollable variables, and decision variables, and the outputs of interest
to the decision maker.

Q. how the decision model helps to make the decision?

Example:
Suppose that a manufacturer has the option of producing a part in-
house or outsourcing it from a supplier. Should the firm produce the
part or outsource it?
Solution:
The decision depends on the anticipated volume of demand (an
uncontrollable variable); for high volumes, the cost to manufacture in-
house will be lower than outsourcing, because the fixed costs can be
spread over a large number of units. For small volumes, it would be more
economical to outsource. Knowing the total cost of both alternatives
(based on data for fixed and variable manufacturing costs and purchasing
costs) and the break-even point would facilitate the decision.
Suppose that a manufacturer can produce a part for $125/unit with a fixed
cost of $50,000. The alternative is to outsource production to a supplier at
a unit cost of $175. The total manufacturing cost is expressed by using
equation
TC (manufacturing)= $50,000 +$125 *Q
and the total outsourcing cost can be written as
TC (outsourcing)= $175*Q
it is easy to find the break-even volume by setting
TC (manufacturing) = TC (outsourcing) and solving for Q:
$50,000 +$125*Q = $175*Q
Q = 1,000
Thus, if the anticipated production volume is greater than 1,000, it is more
economical to manufacture the part; if it is less than 1,000, then it should
be outsourced. This is shown graphically in Figure below.
We may also develop a general formula for the breakeven point by letting
C be the unit cost of outsourcing the part and setting
TC (manufacturing) = TC (outsourcing)
using the formulas:
F+VQ=CQ
Q=F / (C-V)

Predictive model:
1. Predictive models used to predict “what will happen in the future?”
2. predictive models incorporate uncertainty and help decision makers
analyze the risks associated with their decisions.
3. Uncertainty is imperfect knowledge of what will happen;
4. risk is associated with the consequences and likelihood of what
might happen.
A Linear Demand Prediction Model:
A simple model to predict demand as a function of price is the linear
model
D = a + b*P -------------- (1.6)
where D is the demand rate, P is the unit price, a is a constant that
estimates the demand when the price is zero, and b is the slope of the
demand function. This model is most applicable when we want to predict
the effect of small changes around the current price.
Example:
suppose we know that when the price is $100, demand is 19,000 units and
that demand falls by 10 for each dollar of price increase. Using simple
algebra, we can determine that a 20,000 and b 10. Thus, if the price is
$80, the predicted demand is
D = 20,000 -10*$80 = 19,200 units
If the price increases to $90, the model predicts demand as
 D = 20,000 – 10*$90 = 19,100 units

If the price is $100, demand would be

D = 20,000 – 10*$100 = 19,000 units
and so on. A chart of demand as a function of price is shown in Figure
below as price varies between $80 and $120.
We see that there is a constant decrease in demand for each $10 increase in
price, a characteristic of a linear model.

A Nonlinear Demand Prediction Model:

An alternative model assumes that price elasticity is constant. In this case,
the appropriate model is
D = cP-d
where, c is the demand when the price is 0 and d > 0 is the price elasticity.
we assume that when the price is zero, demand is 20,000. Therefore, c
20,000. assume that when the price is $100, D 19,000. Using these values
in equation, we can determine the value for d (we can do this
mathematically using logarithms.
d =-0.0111382
Thus,
If the price is $80, then the predicted demand is
D=20,000*(80)-0.0111382 =19,047
If the price is 90, the demand would be
D=20,000*(90)-0.0111382 =19,022
If the price is 100, the demand would be
D=20,000*(100)-0.0111382 =19,000
A graph of demand as a function of price is shown in Figure below. The
predicted demand falls in a slight nonlinear fashion as price increases.
For example, demand decreases by 25 units when the price increases from
$80 to $90, but only by 22 units when the price increases from $90 to
$100. If the price increases to $100, you would see a smaller decrease in
demand. Therefore, we see a nonlinear relationship in contrast to Example
above.

Observations:
 1. Both models in Examples above (linear model and nonlinear model)
make different predictions of demand for different prices.
2. Which model is best?

Prescriptive Decision Models:

1. A prescriptive decision model helps decision makers to identify the
best solution to a decision problem.
2. Optimization is the process of finding a set of values for decision
variables that minimize or maximize some quantity of interest—
profit, revenue, cost, time.
3. Objective Function is the equation or function that maximize or
minimize the quantity of interest.
4. Optimal solution Any set of decision variables that optimizes the
objective function is called an optimal solution.
5. Constraints are limitations, requirements, or other restrictions that
are imposed on any solution
6. Prescriptive decision models can be either deterministic or
stochastic.
a. A deterministic model is one in which all model input
information is either known or assumed to be known with
certainty.
b. A stochastic model is one in which some of the model input
information is uncertain
7. some prescriptive models, analytical solutions can be obtained using
such techniques as calculus or other types of mathematical analyses.
In most cases, however, some type of computer-based procedure is
needed to find an optimal solution
8. An algorithm is a systematic procedure that finds a solution to a
problem.
9. Search algorithm are used to find solution of complex problems
without guarantee of optimal solution.

Example: A pricing model

a firm wishes to determine the best pricing for one of its products to
maximize revenue over the next year.
A market research study has collected data that estimate the expected
annual sales for different levels of pricing.
Analysts determined that sales can be expressed by the following
model:
sales = 2.9485 * price - 3,240.9
a model for total revenue is
total revenue = price * sales
now the task is to identify the price that will maximize the total revenue
subjected to any constraints that might exist.

Problem solving with analytics

1. The fundamental purpose of analytics is to help managers solve
problems and make decisions.
2. The techniques of analytics represent only a portion of the overall
problem-solving and decision-making process.
3. Problem solving consists of several phases:
a. recognizing a problem
b. defining the problem
c. structuring the problem
d. analyzing the problem
e. interpreting results and making a decision
f. implementing the solution

1. Recognizing a problem:
  Problems exist when there is a gap between what is happening
and what we think should be happening.
 For example, costs of a product are too high compared to
competitors.

2. Defining the problem:

 The second step in the problem-solving process is to clearly
define the problem.
 Finding the real problem and distinguishing it from symptoms
that are observed is a critical step.
 Defining problems is not a trivial task. The complexity of a
problem increases when the following occur:
o Large number of courses of action
o Several competing objectives
o External groups are affected
o Problem owner and problem solver are not the same
person
o Time constraints exist.
 These factors make it difficult to develop meaningful
objectives and characterize the range of potential decisions.
 In defining problems, it is important to involve all people who
make the decisions or who may be affected by them.

3. Structuring the Problem:

 This generally involves stating goals and objectives
 characterizing the possible decisions
 identifying any constraints or restrictions

4. Analyzing the problem:

 This involves identifying and applying appropriate business
analytics technique to find a solution that meets certain goals,
or determining an optimal solution.
 Typically involves experimentation, statistical analysis or a
solution process.
 5. Interpreting Results and Making a Decision:
 Managers interpret the results from analysis phase.
 Incorporate subjective judgment as needed.
 Understand the limitation and model assumption.
 Make a decision utilizing the above information.

6. Implementing the solution:

 Translate the results of the model back to the real world.
 Make the solution work in the organization by providing
adequate training and resources.

Exercise:
1. Return on investment (ROI) is computed in the following manner:
ROI is equal to turnover multiplied by earnings as a percent of sales.
Turnover is sales divided by total investment. Total investment is
current assets (inventories, accounts receivable, and cash) plus fixed
assets. Earnings equal sales minus the cost of sales. The cost of sales
consists of variable production costs, selling expenses, freight and
delivery, and administrative costs.
a. Construct an influence diagram that relates these variables.
b. Define symbols and develop a mathematical model.

2. Sup pose that a manufacturer can produce a part for $10.00 with a
fixed cost of $5,000. The manufacturer can contract with a supplier
in Asia to purchase the part at a cost of $12.00, which includes
transportation.
a. If the anticipated production volume is 1,200 units, compute
the total cost of manufacturing and the total cost of
outsourcing. What is the best decision?
b. Find the break-even volume and characterize the range of
volumes for which it is more economical to produce or to
outsource.

3. Automobiles have different fuel economies (mpg), and commuters

drive different distances to work or school. Suppose that a state
 Department of Transportation (DOT) is interested in measuring the
average monthly fuel consumption of commuters in a certain city.
The DOT might sample a group of commuters and collect
information on the number of miles driven per day, number of
driving days per month, and the fuel economy of their cars. Develop
a predictive model for calculating the amount of gasoline consumed,
using the following symbols for the data.
G = gallons of fuel consumed per month
m = miles driven per day to and from work or school
d = number of driving days per month
f = fuel economy in miles per gallon
Suppose that a commuter drives 30 miles round trip to work 20 days
each month and achieves a fuel economy of 34 mpg. How many
gallons of gasoline are used?

4. The demand for airline travel is quite sensitive to price. Typically,

there is an inverse relationship between demand and price; when
price decreases, demand increases and vice versa. One major airline
has found that when the price (P) for a round trip between Chicago
and Los Angeles is $600, the demand (D) is 500 passengers per day.
When the price is reduced to $400, demand is 1,200 passengers per
day.
a. Plot these points on a coordinate system and develop a linear
model that relates demand to price.
b. Develop a prescriptive model that will determine what price to
charge to maximize the total revenue.
c. By trial and error, can you find the optimal solution that
maximizes total revenue?