Management Science

What is Management Science?  4x = 100 ; x = 100/4 ; x= 25 units

• It is the application of a scientific approach to solving  Substituting the value of 25 for x into the profit function
management problems in order to help managers make better results in the total profit Z = 2000(25) – 500(25) ; = P37,500
decision. Note: Thus, if the manager decides to produce 25 units of the
• It encompasses a number of mathematically oriented product and all 25 units sell, the business firm will receive P37,500
techniques that have either been developed within the field of in profit.
management science or been adapted from other disciplines,  Model Solution
• It is a recognized and established discipline in business. The  Once models have been constructed in management
applications of management science techniques are science, they are solved using the management science
widespread, and they have been frequently credited with techniques presented in this text.
increasing the efficiency and productivity of business firms.  When we refer to model solution, we also mean problem
 Note: Businesses represent the main users of solution
management science. However, management 5. Implementation
science techniques can be applied to solve  The final step in the management science process for
problems in different types of organizations, problem solving described in Figure 1.1 is
including services, government, military, business and implementation.
industry, and health care.  Implementation is the actual use of the model once it has
Steps of the Scientific Method: been developed or the solution to the problem the model
1. Observation was developed to solve.
 the identification of a problem that exists in the system  This is a critical but often overlooked step in the process.
(organization). The system must be continuously and It is not always a given that once a model is developed or
closely observed so that problems can be identified as a solution, it is automatically used. Frequently the person
soon as they occur. responsible for putting the model or solution to use is not
 Problems normally identified by a manager, however it the same person who developed the model, and thus the
can also be identified by a Management Scientist. (a user may not fully un_x0002_derstand how the model
person skilled in the techniques of management science works or exactly what it is supposed to do.
and trained to identify problems, who has been hired
specifically to solve problems using management science
techniques)
2. Problem Definition
 Once it has been determined that a problem exists, the
problem must be clearly and concisely defined.
 Improperly defining a problem can easily result in no
solution or an inappropriate solution. Therefore, the limits
of the problem and the degree to which it pervades other
units of the organization must be included in the problem
definition
3. Model Construction
 A model is an abstract mathematical representation of a
problem situation. It can be in the form of a graph or chart,
but most frequently a management science model consists What are the benefits of Management Science?
of a set of mathematical relationships. These mathematical  it applies systematic approaches to identify and resolve
relationships are made up of numbers and symbols complex organizational issues.
⇒ Example, consider a business firm that sells a product. The  it enhances effieciency by streamlining operations and
product costs P500 to produce and sells for P2000. A model resource allocation to minimize waste and maximize output.
that computes the total profit that will accrue from the items  it optimizes the cost by identifying and reducing unnecessary
sold is (Z (Profit) = 2000x - 500x) ; where X represents the costs
number of units sold and produced.  it improves performance by measuring and monitoring key
⇒ The symbols X and Z are variables. Z is a dependent variable performance indicators .
because its value is dependent on the number of units sold; x  it plans strategically by developing effective long-term
is an independent variable because the number of units sold is strategies based on data analysis and future projections.
not dependent on anything else (in this equation). A variable  it provides data-driven decision by uilizing quantitative data
is a symbol used to represent an item that can take on any and analytical tools .
value. DECISION ANALYSIS
⇒ The numbers P2000 and P500 in the equation are referred to • A DECISION TREE is a flowchart that starts with one main
as parameters. Parameters are constant values that are idea and then branches out based on the consequences of your
generally coefficients of the variables (symbols) in an decisions. It’s called a “decision tree” because the model
equation. They usually remain constant during the process of typically looks like a tree with branches.
solving a specific problem • These trees are used for decision tree analysis, which involves
4. Model Solution visually outlining the potential outcomes, costs, and
 Once models have been constructed in management consequences of a complex decision. You can use a decision
science, they are solved using the management science tree to calculate the expected value of each outcome based on
techniques presented in this text. the decisions and consequences that led to it. Then, by
 When we refer to model solution, we also mean problem comparing the outcomes to one another, you can quickly
solution assess the best course of action. You can also use a decision
 For the example model developed in the previous section, tree to solve problems, manage costs, and reveal
 maximize Z = +2000x - 500 ; subject to 4x = 100 opportunities.
 the solution technique is simple algebra. Solving the Decision tree symbols
constraint equation for x, we have. • Alternative branches

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 Management Science
 are two lines that branch out from one decision on your  Once we have an understanding of the wider problem context
decision tree. These branches show two outcomes or and the specific aims of the project we can begin the analysis
decisions that stem from the initial decision on your tree. of the problem
• Decision nodes  Such analysis is
 are SQUARES and represent a decision being made on likely to be a combination of two types:
your tree. Every decision tree starts with a decision node QUANTITATIVE analysis and QUALITATIVE
• Chance nodes analysis
 are CIRCLES that show multiple possible outcomes  A manager can increase their decision-making effectiveness
• End nodes by learning more about quantitative methodology and models
 are TRIANGLES that show a final outcome and by better understanding their contribution to the decision-
making process.
 The skills of the quantitative approach can be learned only by
studying the assumptions and methods of management science

 Once the problem is recognized through OBSERVATION,

How to create a decision tree  Need to ensure that the problem is properly understood/
DEFINED, it is placed in context and that a clear definition of
the problem to be investigated is agreed. (This is a critical
stage because improper, or inappropriate, structuring and
definition of the problem may result in inappropriate analysis
and inappropriate solutions being applied)
 Then, in the MODELING construction comes the
QUANTITATIVE analysis. A manager who is knowledgeable
in quantitative decision-making models will compare and
evaluate both the qualitative and quantitative sources or
recommendations and ultimately to combine the two sources
in order to make the best possible decision.
 Finally, we come to IMPLEMENTATION of the solution.
This is likely to be a managerial action rather than that of the
management scientist. If the results of the analysis and
solution process are not correctly implemented, the entire
effort may be of no value. One of the most effective ways to
ensure successful implementation is to include users
throughout the modelling process.
MODELS - Management science makes considerable use of
models. Models are representations of real objects or situations
and can be presented in various forms.
 Such models are referred to as mathematical models and are a
critical part of any QUANTITATIVE approach to decision
making.
For example, the total profit from the sale of a product can be
determined by multiplying the profit per unit by the quantity sold.
If we let “X” represent the number of units sold and “P” the total
profit, then, with a profit of P100 per unit, the following
mathematical model defines the total profit earned by selling x
units:
P= P100X
Obviously, this model in equation is quite simple and basic – it
consists of only one equation.
 Let us assume that management have agreed, during the
problem structuring and definition phase, that their
problem is to maximize the company’s profit, P.
 What if each unit of the item produced by the company
takes 5 hours of production time and that each day there
are only 40 hours of production time available given the
existing workforce. We can show the company’s
objective mathematically as:
Maximize P = 100x (Objective function)
Quantitative Analysis We can also show the production limitation as:
5x ≤40 (Constraint)

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 Management Science
 5x shows the amount of production time need to This stays the same if the shoe shop sells 50 pairs or
produce x units 1000 pairs. In our shoe business example let’s say our
 40 shows the total available production time fixed costs are P20,000.
 The symbol shows that the amount of production time • Then we should find the Break Even point in units (or
needed must be less than, or equal to, the 40 hours shoes)
maximum that is available • To find out the number of units that need to be sold to
 We also have a ‘common sense’ requirement that: x≥0 that is, break even, the fixed cost is divided by the contribution
that production cannot be negative. margin per unit.
 We then have a complete model for the production situation: • Break-even units=fixed costs/contribution
Maximize P = 10x margin per unit
Subject to: • So, P20,000 fixed costs divided by our
 5x ≤40 contribution margin (P20000/P200) means we
 x≥0 need to sell 100 SHOES If we do not want to
Models of Cost, Revenue, and Profit lose money or just to breakeven.
Cost and volume models • This means that COMPANY has to sell a
• is one of the common methods of cost accounting used to minimum of 100 pairs of SHOES every month
determine how variance in sales volume and costs impact a to achieve the break-even point of P30,000.
company's profit.
• Cost-volume-profit analysis is a mathematical equation
businesses apply to see how many units of a product they
need to sell to gain a profit or break even.
• Companies use this formula to determine how the changes in
fixed costs, variable costs and sales volume can contribute to
the profits of a business.
• For example, a shoe company may use the cost-volume-profit
analysis to understand how many socks it needs to sell to
earn a P100,000 profit.
C-v-p analysis:
• Cost Volume Profit Analysis includes the analysis of sales
price, fixed costs, variable costs, the number of goods sold,
and how it affects the profit of the business. Components of CVP analysis
• The aim of a company is to earn a profit, and profit depends Fixed costs - costs that don't fluctuate with sales or product
upon a large number of factors, most notable among them is production changes
the cost of manufacturing and the volume of sales. These Variable costs - costs that change as the quantity of products
factors are largely interdependent. changes
• The volume of sales is dependent upon production volume, Contribution margin - difference between the total variable costs
which in turn is related to costs that are affected by the and a company's total revenue.
volume of production, product mix, internal efficiency of the Contribution ratio - This is the contribution margin expressed as
business, production method used, etc. a percentage.
Why CVP analysis is important? Sales volume - number of products that businesses sell during a
 It helps in determining the level at which all relevant cost is specific period
recovered, and if there is no profit or loss, it means it meets Break-even point - when the total costs and revenue are equal,
the breakeven point. It is the point at which volume of sales meaning the business is neither making a loss nor a profit
equals total expenses (both fixed and variable). Thus CVP Selling price - amount a customer pays for the product
analysis helps decision-makers understand the effect of a
change in sales volume, price, and variable cost on the profit Difference Between CVP Analysis and Break Even Analysis
of an entity while taking fixed cost as unchangeable. • Cost Volume Profit (CVP) analysis and Break Even Analysis
 CVP Analysis also helpful when a business is trying to are sometimes used interchangeably but in reality they differ
determine the level of sales to reach a targeted income. from each other in that Break Even analysis is a subset of
How to calculate a cost-volume-profit analysis CVP.
• Put yourself as an owner and you are opening a shoe shop • CVP analysis is a comprehensive analysis that examines the
selling flat shoes. Through research, you discover that you can relationship between sales volume, costs, and profit to
sell each pair for P300. But you need to know the variable determine breakeven points and profit targets. It considers
cost. various factors like sales price, costs, and sales mix.
• The variable cost is the cost to make a pair of Break Even analysis only identifies the sales volume required to
shoe(this would be the leather, glue, thread). This break even. It is a subset of CVP analysis focused on finding the
cost is known as “variable because it “varies” with point where total revenue equals total costs, resulting in zero profit
the number of shoes you make. In our case, the cost or loss. It helps determine the minimum sales volume needed to
of making each pair is P100. cover costs.
• Now let us know the contribution margin (the amount by revenue, cost & profit functions
which revenue exceeds the variable costs of producing that • Revenue is equal to the number of units sold multiplied
revenue.) the price per unit. To obtain the revenue function,
• The formula for calculation contribution margin multiply the output level by the price function.
is: • Costs include the fixed cost as well as the variable cost per
(CM)Contribution Margin = Sales – Variable Costs ( P300- unit. To obtain the cost function, add fixed cost and
P100=P200 per pair) variable cost together.
• Now we need to know fixed costs. These are costs that
remain constant (in total) over some relevant range of
output. Fixed costs include things like rent and insurance.

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• Profit is the revenue it takes in minus what it spends as
costs. To obtain the profit function, subtract costs from
revenue.
Example: The cost to make a sofa is P600 per sofa plus a fixed
setup cost of P4,500. Each sofa sells for P750.

Breakeven analysis

• Break-even analysis refers to the identifying of the point

where the revenue of the company starts exceeding its total
cost i.e., the point when the project or company under
consideration will start generating the profits by the way of
studying the relationship between the revenue of the
company, its fixed cost, and the variable cost.

• It determines what level of sales is required to cover the

total cost of business (Fixed as well as variable cost). It
shows us how to calculate the point or juncture when a
company would start to make a profit.

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