MS01

Management Science : Optimisation Methods
Dr. Lee, Chang-Hun

Text: Introduction to Management Science
Thirteenth Edition, Global Edition
Bernard W. Taylor III

The Management Science Approach
• Management science is a scientific approach to solving management
problems.
• It is used in a variety of organizations to solve many different types of

problems.
• It encompasses a logical mathematical approach to problem solving.
• Management science, also known as operations research, quantitative

methods, business analytics, etc., involves a philosophy of problem solving
in a logical manner.
Steps in the Management Science Process
Observation - Identification of a problem that exists (or may

occur soon) in a system or organization.
Problem Definition - The problem must be clearly and

consistently defined, showing its boundaries and interactions
with the objectives of the organization.
Model Construction - Development of the functional

mathematical relationships that describe the decision
variables, objective function and constraints of the problem.
Model Solution - The model is solved using management

science techniques.
Model Implementation - Actual use of the model or its

solution.
Example of Model Construction
Information and Data:
• Business firm makes and sells a steel product
• Product costs $5 to produce (cost per product)
• Product sells for $20
• Product requires 4 pounds of steel to make

• Firm has 100 pounds of steel
Business Problem:
• Determine the (1) number of units to produce to make the most
profit and (2) profit, given the limited amount of steel available
Variables: x = # units to produce (decision variable)
Z = total profit (in $)
Model: Z = $20x − $5x (objective function)
4x = 100 lb of steel (resource constraint)
Parameters: $20, $5, 4 lbs, 100 lbs (known values)
Formal Specification of Model:
maximize Z = $20x − $5x
subject to 4x = 100
Model Solution:
Solve the constraint equation:
4 x = 100
( 4 x ) = (100 )
4 4
x = 25 units
Substitute this value into the profit function:
Z = $20 x - $5 x
= ( 20 )( 25 ) - ( 5 )( 25 )
= $375
(Produce 25 units, to yield a profit of $375)
Question
1) The Willow Furniture Company produces tables. The fixed monthly cost of
production is $8,000, and the variable cost per table is $65. The tables sells for
$180 apiece.
a. For a monthly volume of 300 tables, determine the total cost, total revenue,
and profit.
b. Determine the monthly break-even volume for the willow furniture company.
Management Science and Business Analytics
• Business analytics uses large amounts of data with management science
techniques to help managers make decisions
• Brings together information technology, statistics, management science,

computer science, engineering, and data science
• Big data
Developing Analytical Career Skills
• Critical thinking – purposeful and goal-oriented problem definition and solution
• Collaborating – necessary in a project team-based environment
• Information Technology & Computing – reliance on computer software
• Data Literacy – ability to access, interpret, manipulate, communicate and

summarize data
Break-Even Analysis
• Used to determine the number of units of a product to sell or produce that will
equate total revenue with total cost.
• The volume at which total revenue equals total cost is called the break-even
point.
• Profit at break-even point is zero.

Break-Even Analysis
Model Components
• Fixed Cost (cf) - costs that are independent of the number of units produced and
remain constant.
• Variable Cost (cv) - unit production cost of product.
• Volume (v) - the number of units produced or sold
• Total variable cost (vcv) - function of volume (v) and unit variable cost.
Break-Even Analysis
• Total Cost (TC) - total fixed cost plus total variable cost.
TC = cf + vcv
• Profit (Z) - difference between total revenue vp (p = unit price)

and total cost, i.e.
Z = vp - ( c f + vc v )
= vp - cf - vcv
Break-Even Analysis
Computing the Break-Even Point
The break-even point is the volume at which total revenue
equals total cost and profit is zero:
vp - cf - vc v = 0
v ( p - cv ) = cf
The break-even point
cf
v=
p - cv
Break-Even Analysis
Example: Western Clothing Company
Fixed Costs: cf = $10,000

Variable Costs: cv = $8 per pair
Price: p = $23 per pair
The Break-Even Point is:
cf
v=
p - cv
$10,000
v=
$23 / pair - $8 / pair
v = 666.7pairs of jeans
Question
• The Rolling Creek textile Mill produces denim. The fixed monthly cost is $21,000, and the
variable cost per yard of denim is $0.45. The mill sells a yard of denim for $1.30.
a. For a monthly volume of 18,000 yards of denim, determine the total cost, total
revenue, and profit.
b. Determine the annual break even volume for the Rolling Creek Textile Mill.
c. If a maximum operating capacity of the Rolling Creek Textile Mill is 25,000 yard of
denim per month, determine the break even volume as a percentage of capacity.
Break-Even Analysis
Figure 1.2 Break-even model
Break-Even Analysis
Figure 1.3 Break-even model with an increase in price
Break-Even Analysis
Figure 1.4 Break-even model with an increase in variable cost
Break-Even Analysis
Figure 1.5 Break-even model with a change in fixed cost
Question
• Maria Eagle is a Native American Artisan. She works part time bowls
and mugs by hand from special pottery clay and then sells her items
to the Beaver Creek Pottery Company. She had 60 hours available
each month to make bowls and mugs, and it takes her 12 hours to
make a bowl and 15hour to make a mug. She use 9 pounds of special
clay to make a bowl, and she needs 5 pounds to make a mug; Maria
has 30 pounds of clay available each month. She make a profit of
$300 for each bowl she delivers, and she makes $250 for each mug.
• Determine the best combinations (highest profit)of bowls and mugs
Maria can make each month.

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Management Science : Optimisation Methods

Dr. Lee, Chang-Hun

Bernard W. Taylor III

• It is used in a variety of organizations to solve many different types of

• It encompasses a logical mathematical approach to problem solving.

• Management science, also known as operations research, quantitative

Observation - Identification of a problem that exists (or may

Problem Definition - The problem must be clearly and

Model Construction - Development of the functional

Model Solution - The model is solved using management

Model Implementation - Actual use of the model or its

• Product requires 4 pounds of steel to make

• Brings together information technology, statistics, management science,

• Collaborating – necessary in a project team-based environment

• Information Technology & Computing – reliance on computer software

• Data Literacy – ability to access, interpret, manipulate, communicate and

• Profit at break-even point is zero.

• Profit (Z) - difference between total revenue vp (p = unit price)

The break-even point

Fixed Costs: cf = $10,000

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