1 BUSI 2013:

Business Decision Analysis

2 Instructor

´Professor:
´Dr. Shimaa ElSherif
´E-Mail Address
´ [email protected]
3 Grading Policy

Graded Item % of Final Grade Due Date

1. Learning Activities
/31.5 Units 1-5 & 7-10
(9x3.5%)
2. Midterm Exam /28.5 Unit 6
5. Final Exam /40 Unit 11
Total /100
Understanding Grades in the Moodle
4

Weight 24% 24% 24% 28% 100%

Name Assignment 1 Assignment 2 Assignment 3 Assignment 4 Total Letter

Grade 70% 70% 70% - 70% B-

Name Assignment 1 Assignment 2 Assignment 3 Assignment 4 Total Letter

Grade 70% 70% 70% 0% 50% D-

The total shown in the moodle is the weighted average including only
assignments marked till now. At the end of the course assignments not
completed will be marked ‘0%’ significantly affecting your grade.
5 Course Material

´Textbook
´Anderson, D. R., Sweeney, D.
J., Williams, T. A., Camm, J. D.,
Cochran, J. J., Fry, M., &
Ohlmann, J. (2015).
Quantitative methods for
business (13th ed.). Cengage
Learning.
 Unit 1
Introduction
6
 Problem Solving and Decision Making
7
´ 7 Steps of Problem Solving
(First 5 steps are the process of decision making)
1. Identify and define the problem.
2. Determine the set of alternative solutions.
3. Determine the criteria for evaluating alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (make a decision).
---------------------------------------------------------------------
6. Implement the selected alternative.
7. Evaluate the results.
 Quantitative Analysis and Decision Making
8
 Decision-Making Process

Structuring the Problem Analyzing the Problem

Define Identify Determine Evaluate Choose

the the the the an
Problem Alternatives Criteria Alternatives Alternative

• Problems in which the objective is to find the best solution

with respect to one criterion are referred to as single-
criterion decision problems. (accepting a job offer for the
highest salary).
• Problems that involve more than one criterion are referred
to as multicriteria decision problems. (considering other
options, e.g. distance and chance of development)
 Quantitative Analysis and Decision Making
9
 Analysis Phase of Decision-Making Process
Qualitative Analysis
• based largely on the manager’s judgment
and experience
• includes the manager’s intuitive “feel” for
the problem
• is more of an art than a science
 Quantitative Analysis and Decision Making
10
 Analysis Phase of Decision-Making Process
Quantitative Analysis
• analyst will concentrate on the quantitative
facts or data associated with the problem
• analyst will develop mathematical expressions
that describe the objectives, constraints, and
other relationships that exist in the problem
• analyst will use one or more quantitative
methods to make a recommendation
 Quantitative Analysis and Decision
11 Making
´Potential Reasons for a Quantitative
Analysis Approach to Decision Making
´The problem is complex.
´The problem is very important.
´The problem is new.
´The problem is repetitive.
 Quantitative Analysis
12
´Quantitative Analysis Process
´Model Development
´Data Preparation
´Model Solution
´Report Generation
13
Model Development
 Model Development
14
´Models are representations of real objects
or situations
´Three forms of models are:
´Iconic models - physical replicas (scalar
representations) of real objects ex. Toy truck
used for real truck
´Analog models - physical in form, but do not
physically resemble the object being modeled.
Ex. Speedometer, thermometer etc.
´Mathematical models - represent real world
problems through a system of mathematical
formulas and expressions based on key
assumptions, estimates, or statistical analyses
 Advantages of Models
15
´ Generally, experimenting with models
(compared to experimenting with the real
situation):
´ requires less time
´ is less expensive
´ involves less risk
´ The more closely the model represents the
real situation, the more accurate the
conclusions and predictions will be.
 Mathematical Models
16
´Objective Function – a mathematical
expression that describes the problem’s
objective, such as maximizing profit or
minimizing cost
´Consider a simple production problem. Suppose x
denotes the number of units produced and sold
each week, and the firm’s objective is to maximize
total weekly profit. With a profit of $10 per unit,
The objective function is 10x.
 Mathematical Models
17
 Constraints – a set of restrictions or limitations, such as
production capacities
 To continue our example, a production capacity
constraint would be necessary if, for instance, 5 hours
are required to produce each unit and only 40 hours
are available per week. The production capacity
constraint is given by 5x < 40.
 The value of 5x is the total time required to produce x
units; the symbol < indicates that the production time
required must be less than or equal to the 40 hours
available.
 Mathematical Models
18
 Uncontrollable Inputs – environmental factors that
are not under the control of the decision maker
 In the preceding mathematical model, the
profit per unit ($10), the production time per unit
(5 hours), and the production capacity (40
hours) are environmental factors not under the
control of the manager or decision maker.
 Mathematical Models
19
 Decision Variables – controllable inputs; decision
alternatives specified by the decision maker, such
as the number of units of a product to produce.
 In the preceding mathematical model, the
production quantity x is the controllable input
to the model.
 Mathematical Models
20
 A complete mathematical model for our simple
production problem is:

Maximize10x (objective function)

subject to: 5x < 40 (constraint)
x>0 (constraint)

[The second constraint reflects the fact that it is not

possible to manufacture a negative number of
units.]
 Mathematical Models
21
 Deterministic Model – if all uncontrollable inputs to
the model are known and cannot vary. Ex.
Corporate taxes
 Stochastic (or Probabilistic) Model – if any
uncontrollable are uncertain and subject to
variation. Stochastic models are often more
difficult to analyze.
 In our simple production example, if the
number of hours of production time per unit
could vary from 3 to 6 hours depending on the
quality of the raw material, the model would
be stochastic.
 Mathematical Models
22
 Cost/benefit considerations must be made in
selecting an appropriate mathematical model.
 Frequently a less complicated (and perhaps less
precise) model is more appropriate than a more
complex and accurate one due to cost and
ease of solution considerations.
 Transforming Model Inputs into Output
23

Uncontrollable Inputs
(Environmental Factors)

Controllable
Output
Inputs Mathematical
(Projected
(Decision Model
Results)
Variables)
24
Data Preparation
 Data Preparation
25
´ Data preparation is not a trivial step, due to the
time required and the possibility of data
collection errors.
´ A model with 50 decision variables and 25
constraints could have over 1300 data elements!
´ Often, a fairly large data base is needed.
´ Information systems specialists might be needed.
26
Model Solution
 Model Solution
27
´ The analyst attempts to identify the alternative
(the set of decision variable values) that provides
the “best” output for the model.
´ The “best” output is the optimal solution.
´ If the alternative does not satisfy all of the model
constraints, it is rejected as being infeasible,
regardless of the objective function value.
´ If the alternative satisfies all of the model
constraints, it is feasible and a candidate for the
“best” solution.
 Model Solution
28
§ Trial-and-Error Solution for Production Problem
Production Projected Total Hours Feasible
Quantity Profit of Production Solution
0 0 0 Yes
2 20 10 Yes
4 40 20 Yes
6 60 30 Yes
8 80 40 Yes
10 100 50 No
12 120 60 No
 Model Solution
29
´A variety of software packages are
available for solving mathematical
models.
´Microsoft Excel
´LINGO
 Model Testing and Validation
30
´ Often, goodness/accuracy of a model
cannot be assessed until solutions are
generated.
´ Small test problems having known, or at least
expected, solutions can be used for model
testing and validation.
´ If the model generates expected solutions,
use the model on the full-scale problem.
´ If inaccuracies or potential shortcomings
inherent in the model are identified, take
corrective action such as:
´ Collection of more-accurate input data
´ Modification of the model
31
Report Generation
 Report Generation
32
´A managerial report, based on the results
of the model, should be prepared.
´The report should be easily understood by
the decision maker.
´The report should include:
´the recommended decision
´other detailed information about the results
(for example, how sensitive the model solution
is to the assumptions and data used in the
model)
 Implementation and Follow-Up
33
´Successful implementation of model
results is of critical importance.
´Secure as much user involvement as
possible throughout the modeling process.
´Continue to monitor the contribution of
the model.
´It might be necessary to refine or expand
the model.
34
Sample Models
Cost Profit Analysis
 Models of Cost, Revenue, and Profit
35 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. Denote by p1 and
p2 the unit profits for products 1 and 2, respectively.
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.
 Example: Iron Works, Inc.
36
´Mathematical Model
´The 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)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2
 Example: Iron Works, Inc.
37
´Mathematical Model (continued)
´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
This quantity must be less than or equal
to the allocated b pounds of steel:
a1x1 + a2x2 < b
 Example: Iron Works, Inc.
38
´Mathematical Model (continued)
´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
´However, the production level for product 2
cannot be negative:
x2 > 0
 Example: Iron Works, Inc.
39
´Mathematical Model Summary

Max p1x1 + p2x2

Constraints

Objective s.t. a1x1 + a2x2 < b

Function
x1 > m
x2 < u
x2 > 0
“Subject to”
 Example: Iron Works, Inc.
40
´Question:
Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u =
720, p1 = 100, and p2 = 200.
Rewrite the model with these specific values
for the uncontrollable inputs.
 Example: Iron Works, Inc.
41
´Answer:
Substituting, the model is:

Max 100x1 + 200x2

s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
 Example: Iron Works, Inc.
42
´ 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.)
 Example: Iron Works, Inc.
43 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
2000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2

Max 100(60) + 200(626.67) Profit = $131,333.33

60 units Prod. 1
s.t. 2(60) + 3(626.67) < 2000 Steel Used = 2000
626.67 units Prod. 2
60 > 60
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model
44
Model 2
Break Even Analysis
 Example: Ponderosa Development Corp.
45
Ponderosa Development Corporation (PDC) is a small
real estate developer that builds only one style cottage.
The selling price of the cottage is $115,000.
Land for each cottage costs $55,000 and lumber,
supplies, and other materials run another $28,000 per
cottage. Total labor costs are approximately $20,000 per
cottage.
Ponderosa leases office space for $2,000 per month. The
cost of supplies, utilities, and leased equipment runs
another $3,000 per month.
The one salesperson of PDC is paid a commission of
$2,000 on the sale of each cottage. PDC has seven
permanent office employees whose monthly salaries are
given on the next slide.
 Example: Ponderosa Development Corp.
46

Employee Monthly 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
 Example: Ponderosa Development Corp.
47
´ Question:
Identify all costs and denote the marginal cost
and marginal revenue for each cottage.
´ Answer:
The monthly salaries total $35,000 and 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 cottage, $105,000, is the
marginal cost for a cottage.
The selling price of $115,000 is the marginal
revenue per cottage.
 Example: Ponderosa Development Corp.
48
´ Question:
Write the monthly cost function c(x), revenue
function r(x), and profit function p(x).
´ Answer:
c(x) = variable cost + fixed cost = 105,000x +
40,000
r(x) = 115,000x
p(x) = r(x) - c(x) = 10,000x - 40,000
 Example: Ponderosa Development Corp.
49
´ Question:
What is the breakeven point for monthly sales
of the cottages?
´ Answer:
r(x ) = c(x )
115,000x = 105,000x + 40,000
Solving, x = 4 cottages.
 Example: Ponderosa Development Corp.
50
´ Question:
What is the monthly profit if 12 cottages per
month are built and sold?
´ Answer:
p(12) = 10,000(12) - 40,000 = $80,000 monthly profit
 Example: Ponderosa Development
51 Corp.
1200
Total Revenue =

Thousands of Dollars
1000 115,000x

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

200
Break-Even Point = 4 Cottages
0
0 1 2 3 4 5 6 7 8 9 10
Number of Cottages Sold (x)
52
Excel Practice
 Using Excel for Breakeven Analysis
53
 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.
 Example: Ponderosa Development Corp.
54
 Formula Spreadsheet
 Example: Ponderosa Development Corp.
55
 Question
What is the monthly profit if 12 cottages are built
and sold per month?
 Example: Ponderosa Development Corp.
56
 Spreadsheet Solution
 Example: Ponderosa Development Corp.
57
 Question:
What is the breakeven point for monthly sales
of the cottages?
 Spreadsheet Solution:
• One 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.
• In our case, the goal is to set Total Profit to zero
by seeking an appropriate value for Sales
Volume.
 Example: Ponderosa Development Corp.
58
 Spreadsheet Solution: Goal Seek Approach
Using Excel ’s Goal Seek Tool
Step 1: Select Data tab at the top of the ribbon
Step 2: Select What-If Analysis in Data Tools
group
Step 3: Select Goal Seek in What-If Analysis
Step 4: 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
 Example: Ponderosa Development Corp.
59
 Spreadsheet Solution: Goal Seek Approach

Completed Goal Seek Dialog Box

 Example: Ponderosa Development Corp.
60
 Spreadsheet Solution: Goal Seek Approach
61

. SLIDES
.
. BY
.
.
.
.
. John Loucks
.
. St. Edward’s Univ.
.
.

@ Cengage Learning, All rights reserved.

Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., Cochran, J. J., Fry, M., &
Ohlmann, J. (2015). Quantitative methods for business (13th ed.). Cengage Learning.
62

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