Chapter 1

Introduction to
Quantitative Analysis
 Learning Objectives
After completing this chapter, students will be able to:

1. Describe the quantitative analysis approach

2. Understand the application of quantitative
analysis in a real situation
3. Describe the use of modeling in quantitative
analysis
4. Use computers and spreadsheet models to
perform quantitative analysis
5. Discuss possible problems in using
quantitative analysis
6. Perform a break-even analysis

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 Introduction

 Mathematical tools have been used for

thousands of years.
 Quantitative analysis can be applied to
a wide variety of problems.
 It’s not enough to just know the
mathematics of a technique.
 One must understand the specific
applicability of the technique, its
limitations, and its assumptions.

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 What is Quantitative Analysis?

Quantitative analysis is a scientific approach

to managerial decision making in which raw
data are processed and manipulated to
produce meaningful information.

Quantitative Meaningful
Raw Data Analysis Information

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 What is Quantitative Analysis?

 Quantitative factors are data that can be

accurately calculated. Examples include:
 Different investment alternatives
 Interest rates
 Inventory levels
 Demand
 Labor cost
 Qualitative factors are more difficult to
quantify but affect the decision process.
Examples include:
 The weather
 State and federal legislation
 Technological breakthroughs.

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 The Quantitative Analysis Approach

Defining the Problem

Developing a Model

Acquiring Input Data

Figure 1.1
Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

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 Defining the Problem
Develop a clear and concise statement that
gives direction and meaning to subsequent
steps.
 This may be the most important and difficult
step.
 It is essential to go beyond symptoms and
identify true causes.
 It may be necessary to concentrate on only a
few of the problems – selecting the right
problems is very important
 Specific and measurable objectives may have
to be developed.

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 Developing a Model
Quantitative analysis models are realistic,
solvable, and understandable mathematical
representations of a situation.

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 Developing a Model

Models generally contain variables and

parameters.
 Controllable variables are the decision
variables and are generally unknown.
 How many items should be ordered for inventory?
 Parameters are known quantities that are a
part of the model.
 What is the holding/carrying cost of the inventory?

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 Acquiring Input Data

Input data must be accurate – GIGO rule:

Garbage
In
Process
Garbage
Out

Data may come from a variety of sources such as

company reports, company documents, interviews,
on-site direct measurement, or statistical sampling.
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 Developing a Solution

The best (optimal) solution to a problem is

found by manipulating the model variables
until a solution is found that is practical
and can be implemented.

Common techniques are

 Solving equations.
 Trial and error – trying various approaches
and picking the best result.
 Complete enumeration – trying all possible
values.
 Using an algorithm – a series of repeating
steps to reach a solution.
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 Testing the Solution

Both input data and the model should be

tested for accuracy before analysis and
implementation.
 New data can be collected to test the model.
 Results should be logical, consistent, and
represent the real situation.

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 Analyzing the Results
Determine the implications of the solution:
 Implementing results often requires change in
an organization.
 The impact of actions or changes needs to be
studied and understood before
implementation.

Sensitivity analysis determines how much

the results will change if the model or
input data changes.
 Sensitive models should be very thoroughly
tested.

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 Implementing the Results
Implementation incorporates the solution
into the company.
 Implementation can be very difficult.
 People may be resistant to changes.
 Many quantitative analysis efforts have failed because
a good, workable solution was not properly
implemented.

Changes occur over time, so even successful

implementations must be monitored to determine if
modifications are necessary.

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 Modeling in the Real World

Quantitative analysis models are used

extensively by real organizations to solve
real problems.
 In the real world, quantitative analysis
models can be complex, expensive, and
difficult to sell.
 Following the steps in the process is an
important component of success.

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How To Develop a Quantitative
Analysis Model

A mathematical model of profit:

Profit = Revenue – Expenses

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 How To Develop a Quantitative
Analysis Model
Expenses can be represented as the sum of fixed and
variable costs. Variable costs are the product of unit
costs times the number of units.
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units
sold) – [Fixed cost + (Variable costs per
unit)(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
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 How To Develop a Quantitative
Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable costs are the product of unit
costs times the number of units
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units
sold) – [Fixed cost + (Variable costs per
unit)(Number of units sold)]
Profit = sX – [f + vX] The parameters of this model are f, v, and s
as these are the inputs inherent in the model
Profit = sX – f – vX
The decision variable of interest is X

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
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 Pritchett’s Precious Time Pieces
The company buys, sells, and repairs old clocks.
Rebuilt springs sell for $10 per unit. Fixed cost of
equipment to build springs is $1,000. Variable cost
for spring material is $5 per unit.

s = 10 f = 1,000 v=5
Number of spring sets sold = X
Profits = sX – f – vX

If sales = 0, profits = -f = –$1,000.

If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000

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 Pritchett’s Precious Time Pieces
Companies are often interested in the break-even
point (BEP). The BEP is the number of units sold
that will result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f
Solving for X, we have
f = (s – v)X
f
X=
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

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 Pritchett’s Precious Time Pieces
Companies are often interested in their break-even
point (BEP). The BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit.
BEP
0= sX –= f$1,000/($10
– vX, or – 0$5) = –200
= (s v)Xunits
–f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
will result in a loss.
f = (s – v)X
Sales of over 200 units of rebuilt springs will
result in a profit. X = f
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

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 Advantages of Mathematical Modeling

1. Models can accurately represent

reality.
2. Models can help a decision maker
formulate problems.
3. Models can give us insight and
information.
4. Models can save time and money in
decision making and problem solving.
5. A model may be the only way to solve
large or complex problems in a timely
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 Models Categorized by Risk

 Mathematical models that do not

involve risk are called deterministic
models.
 All of the values used in the model are
known with complete certainty.
 Mathematical models that involve
risk, chance, or uncertainty are
called probabilistic models.
 Values used in the model are
estimates based on probabilities.
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 Possible Problems in the
Quantitative Analysis Approach
Defining the problem
 Problems may not be easily identified.
 There may be conflicting viewpoints
 There may be an impact on other departments.
 Beginning assumptions may lead to a particular
conclusion.
 The solution may be outdated.

Developing a model
 Manager’s perception may not fit a textbook model.
 There is a trade-off between complexity and ease of
understanding.

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 Possible Problems in the
Quantitative Analysis Approach
Acquiring accurate input data
 Accounting data may not be collected for quantitative
problems.
 The validity of the data may be suspect.

Developing an appropriate solution

 The mathematics may be hard to understand.
 Having only one answer may be limiting.

Testing the solution for validity

Analyzing the results in terms of the whole
organization
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 Implementation –
Not Just the Final Step
There may be an institutional lack of
commitment and resistance to change.
 Management may fear the use of formal analysis
processes will reduce their decision-making
power.
 Action-oriented managers may want “quick and
dirty” techniques.
 Management support and user involvement are
important.

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 Implementation –
Not Just the Final Step
There may be a lack of commitment
by quantitative analysts.
 Analysts should be involved with the
problem and care about the solution.
 Analysts should work with users and take
their feelings into account.

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 Exercises
1-14: Gina Fox has started her own
company, Foxy Shirts, which
manufactures imprinted shirts for
special occasions. Since she has just
begun this operation, she rents the
equipment from a local printing shop
when necessary. The cost of using the
equipment is $350. The materials used
in one shirt cost $8, and Gina can sell
these for $15 each.
(a) If Gina sells 20 shirts, what will her
total revenue be? What will her total
variable cost be?
(b) How many shirts must Gina sell to
break even? What is the total revenue
for this?
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 Exercises
1-15: Ray Bond 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. How many of
these must Ray sell to break
even?

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 Exercises
1-16: Ray Bond, from Problem
1-15, is trying to find a new
supplier that will reduce his
variable cost of production to
$15 per unit. If he was able to
succeed in reducing this cost,
what would the break-even
point be?

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 Exercises
1-17: Katherine D’Ann is planning
to finance her college education by
selling programs at the football
games for State University. There
is a fixed cost of $400 for printing
these programs, and the variable
cost is $3. There is also a $1,000 fee
that is paid to the University for
the Right to sell these programs. If
Katherine was able to sell
programs for $5 each, how many
would she have to sell in order to
break even?

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 Exercises
1-18: Katherine D’Ann, from
Problem 1-17, has become
concerned that sales may fall, as
the team is on a terrible losing
streak, and attendance has fallen
off. In fact, Katherine believes that
she will sell only 500 programs for
the next game. If it was possible to
raise the selling price of the
program and still sell 500, what
would the price have to be for
Katherine to break even by selling
500?

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 Exercises
1-19: Farris Billiard Supply sells all
types of billiard equipment, and is
considering manufacturing their own
brand of pool cues. Mysti Farris, the
production manager, is currently
investigating the production of a
standard house pool cue that should be
very popular.
Upon analyzing the costs, Mysti
determines that the materials and labor
cost for each cue is $25, and the fixed
cost that must be covered is $2,400 per
week. With a selling price of $40 each,
how many pool cues must be sold to
break even? What would the total
revenue be at this break-even point?
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 Exercises
1-20: Mysti Farris (see Problem 1-
19) is considering raising the selling
price of each cue to $50 instead of
$40. If this is done while the costs
remain the same, what would the
new break-even point be? What
would the total revenue be at this
break-even point?

1-21: Mysti Farris (see Problem 1-

19) believes that there is a high
probability that 120 pool cues can be
sold if the selling price is
appropriately set. What selling price
would cause the break-even point to
be 120?
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