MANAGEMENT SCIENCE

CHAPTER 1 INTRODUCTION
DATE • TIME

TOPICS
• Define the term management science
• Describe the nature of management science
• Explain what a mathematical model is
• Use a mathematical model to perform break-even-analysis
• Use a spreadsheet model to perform a break-even-analysis
• Describe the relationship between analytics and
management science
Housekeeping Rules

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What is Management Science?
Management Science is a discipline that attempts to aid managerial
decision making by applying a scientific approach to managerial problems
that involve quantitative factors

Management Science (MS) is the broad interdisciplinary study of

problem solving and decision making in human organizations, with
strong links to management, economics, business, engineering,
management consulting, and other fields. It uses various scientific
research-based principles, strategies, and analytical methods including
mathematical modeling, statistics and numerical algorithms to improve
an organization's ability to enact rational and accurate management
decisions by arriving at optimal or near optimal solutions to complex
decision problems. Management science helps businesses to achieve
goals using various scientific methods.
 The Nature of Management Science

• Management science is a discipline

• Management science aids managerial
decision making
• Management uses a scientific approach
• Management science considers
quantitative factors
Management Science Uses a Scientific
Approach
Step 1: Define the problem and gather data
Step 2: Formulate a model (typically a mathematical model) to
represent the problem
Step 3: Develop a computer-based procedure for deriving
solutions to the problem from the model.
Step 4: Test the model and refine as needed
Step 5: Apply the model to analyze the problem and develop
recommendations for management.
Step 6: Help to implement the team’s recommendations that
are adopted by management.
What is a Mathematical Model?
• It is a description of a system using mathematical concepts
and language. A model may help to explain a system and to
study the effects of different components, and to make
predictions about behavior.
• Mathematical models are approximate representations, but
they are expressed in terms of mathematical symbols and
expressions. Such laws of Physics: Force = ma; E= mc2 are
examples. Similarly, the mathematical model of a business
problem is the system of equations and related
mathematical expressions that describes the essence of the
problem.
 What is Analytics?
Analytics is a broad term that includes both management
science and all the other quantitative decision sciences, such
as mathematics, statistics, computer science, data science,
industrial engineering, etc. By drawing on any of these tools
to analyze the available data, analytics can be defined as the
scientific process of transforming data into insight for making
better decisions.

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 Three Categories of Analytics
• Descriptive Analytics
• Uses innovative techniques to locate the relevant data and identify the
interesting patterns in order to describe and understand what is going on now.
• Predictive Analytics
• Applies predictive models to historical data and perhaps external data to
predict future events or trends.
• Prescriptive Analytics
• Involves applying sophisticated models to the data to prescribe what should be
done in the future.
• The powerful optimization models and techniques of managements science are
commonly used here.
• This is the most advanced category.
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 Some Examples of Using Analytics
• The Obama campaign of 2012
• The campaign management hired a multi-disciplinary team of statisticians,
predictive modelers, data-mining experts, mathematicians, sofware
programmers, and management scientists.
• With all this analytics input, the Obama team leveraged massive amounts of
data to directly micro-target potential voters and donors with tailored
messages.
• The Oakland Athletics
• The book Moneyball and subsequent 2011 movie tell the story of how the
Oakland Athletics baseball team achieved great success, despite a small
budget.
• They used nontraditional data (referred to as saber metrics) to better evaluate
the potential of players.
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Special Products Break-Even Analysis
• The Special Products Company produces expensive and unusual gifts.
• The latest new-product proposal is an iWatch with wireless internet.
• Data:
• If they go ahead with this product, a fixed cost of $10 million is incurred.
• The variable cost is $1000 per iWatch produced.
• Each iWatch sold would generate $2000 in revenue.
• A sales forecast will be obtained.

Question: Should they produce the iWatch, and if so, how many?

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Expressing the Problem Mathematically
• Decision variable:
• Q = Number of iWatches to produce
• Costs:
• Fixed Cost = $10 million (if Q > 0)
• Variable Cost = $1000 Q
• Total Cost =
• 0, if Q = 0
• $10 million + $1000 Q, if Q > 0
• Profit:
• Profit = Total revenue – Total cost
• Profit = 0, if Q = 0
• Profit = $2000Q – ($10 million + $1000Q) = –$10 million + $1000Q, if Q > 0

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Special Products Co. Spreadsheet
A B C D E F
1 Special Products Co. Break-Even Analysis Range Name Cell
2 FixedCost C5
3 Data Results MarginalCost C6
4 Unit Revenue $2,000 Total Revenue $40,000,000 ProductionQuantity C9
5 Fixed Cost $10,000,000 Total Fixed Cost $10,000,000
Profit F7
6 Marginal Cost $1,000 Total Variable Cost $20,000,000
SalesForecast C7
7 Sales Forecast 30,000 Profit (Loss) $10,000,000
TotalFixedCost F5
8
TotalRevenue F4
9 Production Quantity 20,000
TotalVariableCost F6
UnitRevenue C4
Special Products Co. Spreadsheet
A B C D E F
1 Special Products Co. Break-Even Analysis
2 Range Name Cell
3 Data Results BreakEvenPoint F9
4 Unit Revenue $2,000 Total Revenue $60,000,000 FixedCost C5
5 Fixed Cost $10,000,000 Total Fixed Cost $10,000,000 MarginalCost C6
6 Marginal Cost $1,000 Total Variable Cost $30,000,000 ProductionQuantity C9
7 Sales Forecast 30,000 Profit (Loss) $20,000,000 Profit F7
8 SalesForecast C7
9 Production Quantity 30,000 Break-Even Point 10,000
TotalFixedCost F5
TotalRevenue F4
TotalVariableCost F6
UnitRevenue C4
 PROBLEMS
1.1. The manager of a small firm is considering whether to produce
a new product that would require leasing some special equipment
at a cost of $20,000 per month. In addition to this leasing cost, a
production cost of $10 would be incurred for each unit of the
product produced. Each unit sold would generate $20 in revenue.

Develop a mathematical expression for the monthly profit that

would be generated by this product in terms of the number of units
produced and sold per month. Then determine how large this
number needs to be each month to make it profitable to produce
the product.

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 Answer
If Q units are produced per month, then
Monthly Profit = $0 {if Q = 0} and –$20,000 + ($20 – $10)Q {if Q >
0}.
Break-even point = $20,000 / ($20 – $10) = 2000, so it will be
profitable to produce if Q > 2000

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 PROBLEMS
1.2. Management of the Toys R4U Company needs to decide whether to introduce a
certain new novelty toy for the upcoming Christmas season, after which it would be
discontinued. The total cost required to produce and market this toy would be
$500,000 plus $15 per toy produced. The company would receive revenue of $35 for
each toy sold.
a) Assuming that every unit of this toy that is produced is sold, write an expression
for the profit in terms of the number produced and sold. Then find the break-even
point that this number must exceed to make it worthwhile to introduce this toy.
b) Now assume that the number that can be sold might be less than the number
produced. Write an expression for the profit in terms of these two numbers.
c) Formulate a spreadsheet that will give the profit in part b for any values of the
two numbers.
d) Write a mathematical expression for the constraint that the number produced
should not exceed the number that can be sold.

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 Answer
A) Let Q be the number of units produced and sold. Then
Monthly Profit = $0 {if Q = 0} and –$500,000 + ($35 – $15)Q {if Q > 0}.
Break-even point = $500,000 / ($35 – $15) = 25,000.
B) Let Q be the number produced and s the number that can be sold.
Then
Profit = [0 if Q = 0] and [-$500,000 + $35 * MIN(Q, s) – $15Q if Q > 0].
C)

D) Q ≤ s.
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 PROBLEM
1.6. The Water Sports Company soon will be producing and marketing a new model
line of motor boats. The production manager, Michael Jensen, now is facing a make-or-
buy decision regarding the outboard motor to be installed on each of these boats.
Based on the total cost involved, should the motors be produced internally or
purchased from a vendor? Producing them internally would require an investment of
$1 million in new facilities as well as a production cost of $1,600 for each motor
produced. If purchased from a vendor instead, the price would be $2,000 per motor.
a) Michael has obtained a preliminary forecast from the company’s marketing
division that 3,000 boats in this model line will be sold.
b) Use spreadsheets to display and analyze Michael’s two options. Which option
should be chosen?
c) Michael realizes from past experience that preliminary sales forecasts are quite
unreliable, so he wants to check on whether his decision might change if a more
careful forecast differed significantly from the preliminary forecast. Determine
a break-even point for the production and sales volume below which the buy
option is better and above which the make option is better.
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 Answer
A B C D E
A) 1 Data Results
2 Fixed Production Cost $1,000,000 Fixed Production Cost $1,000,000
3 Marginal Production Cost $1,600 Variable Production Cost $4,800,000
4 Marginal Purchase Cost $2,000 Total Cost if Produce $5,800,000
5 Sales Forecast 3,000
6 Total Cost if Purchase $6,000,000

They should produce the motors internally.

B) Break-even point = $1,000,000 / ($2,000 - $1,600) = 2,500.

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FINISH YOUR EXERCISES