| CHAPTER 1 Overview of Management Science Learning Objectives ‘At the end of this chapter, the student should be able to: 1. define management science; 2. state the nature of management science; explain the steps involved in the quantitative analysis approach, 4, discuss the limitations of management science; and 5. identify different quantitative techniques. DEFINITION All members of management engage in planning, coordinating, directing, and controlling to achieve desired organizational goals and objectives. The common denominator among these management functions is decision-making. Sound management practice dictates that decision- making should be based on reliable quantitative information that results from a rational and scientific approach. Management science is defined as the scientific approach used to determine management problems and make economic decisions using quantitative tools to achieve the optimum solution. Management science is also known as decision science, operations research, quantitative analysis, and optimization technique.FRE 2 Mowannns Sema A Quam Arron 10 Deco Maton NATURE OF MANAGEMENT SCIENCE The major characteristics of management science are as follows lems or dilemmas ment prol Js in finding solutions fo management 1. Itis primarily intended to solve manage' It uses quantitative tools or mathematical model problems ntitative tool or mathematical 3. Itobserves the assumptions inherent in a particular aia titati a particular quantitative model model jon and analysis. ations of 4. Itdoes not violate the constraints or limit uantitative informati 5, Itadopts a decision based entirely on 4 ; finding the optimal solution ysis approach in 6. Itemploys the quantitative ched not through guesswork oF [rial handling, QUANTITATIVE ANALYSIS APPROACH economic decision is rea , ‘employs the quantitative analysis approach i ysis is a process of Solving management problems with In management science, an and error, Rather, management seience managerial problems. Quantitative ana the use of a scientific approach, i sl .e following steps: The quantitative analysis approach consists of the following step 1. Defining the management problem Developing a mathematical model sathering quantitative data Finding the optimal solution 4 5, Checking the results Analyzing and evaluating the findings Implementing the findings Defining the Management Problem process of clearly identifying the problem that besets management blem is a difficult task to undertake. al management prol m that is identified, not the real problem. The main profitability level and reduce the costs of a This step involves the The process of identifying the re Oftentimes, it is the symptom of a problet concern of a managerial problem is to improve the business organization. confronted with several pressing problems involving both quantitative ‘A business may be and qualitative data, The quantitative analysis approach can handle one problem at a time the use of quantitative data only. Quantitative data are data that are expressed in numerica’joes, and mathematical operations can be p performed using her ot units deliv rformed using d. Unit cost of a product data, #0 mathematical operatic m, behavior of customers, jon numerical Examples of these an *:. Qualitative dats amples of these ar. of a company “ id transportation com Ss caNnot be executed. f and the reward system weather condit peveloping a Mathematical Model \ model is a representation of an event, situation, relations imate can only handle one problem at a time. The piysical model, scale model, schematic model, or mathematical model. & physica meds representation of a building, condominium, or hotel that engineers may eecmar oe \ scale model is a representation of a car, airplane, heavy equipment, tools of macriner nes manufacturers may produce. A schematic model is a graphical diagram, pictore, deeenn emage of a device or mechanical parts ’ Picture, drawing, ship, oF reality The ative different types of models may inchude The quantitative approach utilizes a mathematical m representation of mathematical relationships of variables a in inequalities and equations. Variables are unknown determined, while parameters are known quantities wh: example, in the cost-volume-profit model (CVP), unit selling price and unit variable cost are the par, ‘odel. A mathematical model is 2 nd their parameters. It is expressed quantities whose values must be ‘ose values are usually given. Fc the break-even point is a variable, while the ameters, Gathering Quantitative Data The quantitative data needed to represent the model must be collected. The two important factors that must be considered in the collection of quantitative data are the accuracy of the data and the reliability of the source. The result of any quantitative analysis becomes ‘misleading and doubtful when there is a question on the correctness of the data and the reliability of their source. The drawback of this step is that sometimes the quantitative data are not readily available or do not fit to the mathematical representation. . Finding the Optimal Solution This step involves the mathematical manipulation of a model to arrive at the optimal solution. Most mathematical models involve a series of repeated procedures to find solutions. This process is known as an algorithm. However, there are management problems that require all possible values of a variable to be tested in the model to arrive at the best solution. This approach is called complete enumeration. The problem with this step is that mathematical models can sometimes be complicated and hardly understandable. As a result, a manager who does not fully understand and appreciate a mathematical model might hesitate to implement its result.4 Masewsanmnny Scares A Qivanurieaton Armee 46) DY racine MAR Checking the Results The results of the mathematical manipulate inclu nn tin mw on 1 be 1th gathering of additional data may be und taken to coll a ware Lhe ch renul Of previously collected data, Statistical measures 2 he ador atenc ov the model, the vests, and the reliability te es Analyzing and Evaluating the Findings van ed, the ¢ alyst may proceee jo analyzing, and. perly checked | nuire quanti approach inte Onve the results have been pret volves the of HE breakin needed ti rial decision drawing a man. stilts, Analysis Inv aluating the several parts to identify the provi Tale ‘Panedd on a particular criterion or standard, Evaluating the results refers to makin ments, ba whether of not to proceca! with te Finding Implementing the Findings ach is the implementation of the results analysis appr voi jenstood the underlying conceP!s of the approach that the quantitative findings will provide entire process and related efforts ntitative sment has un J of the likelihood 1. Otherwise, the The final step in the This happens when the mange conducted and is fully convinces Fiocanctal benefits to the business orgartiZatior become meaningless LIMITATIONS OF MANAGEMENT SCIENCE titative analysis approach in solving ent _science adopts the quant so has some limitations a! nd constraints such as the following: 1. The members of management May have contradicting which could lead to resistance. For example, when the marketing department could recommend increasing production immediately. This from the-finance and operation departments because availability of raw materials, and cost efficiency icular problem has an impact on the Although manage’ managerial problems, perspectives regarding a problem, inventory level is low, the solution may receive resistance of cash flow problems, product quality, issues, This implies that a solution to a par different departments of an organization. The mathematical model may be too complex or may not fit reality, A model that is developed under certain assumptions could work reliably if the assumptions are fully deere chis means that recommended solutions may no longer be reliable when the assumptions are violated or have been relaxed just to fit reality. For example, in the CVP model, one of the assumptions is that the sales mix ratio is held constant. n reality, however, this does not happen because the demand for a product changes as he demand variables change.A Charen t | Owearw or Masacenent Since § BR » data collected, either by The — Sewicie a fy the accounting department or other offi tb suificient for quantitative analysis, Tor ee ne other offices, may not be department ony Ress track of the ae An ventory recording, the accounting jccounting department does not maint, St and total cost of the inventory. The seve ng part OF an Rot maintain a record that accounts se da ibe and catty ing entory which are needed = Sane euee (£0) model in the economic order quantity The quantitative analysis approach em quantita employs only quanti solution based on a mathematical representation. diene eave (data and suggests a of qualitative information. Qualitative factors net regards entirely the significance preference, or technological development are of equal immer rr oerams: customer data in drawing management decisions, ‘portance with quantitative 3 MANAGEMENT SCIENCE TOOLS Management science, although it draws its concepts N men ee s pts from vi F economics, statistics, engineering, and mathematics, makes use on cari Secplina vis-a-vis management problems. Various quantitative techniques and those that erento nee iculum of the business program are discussed as follows, nt * included in the new curl din Linear programming. The general linear Programming formulation was introduced i c luce 1939 by Soviet economist Leonid Vitaliyevich K, linear programming include the following antorovich, The different approaches to a. Graphical method b. Simplex method ¢. Transportation problem d. Assignment problem The simplex method was introduced in 1947 by George Dantzig. The transportation problem was mathematically introduced by A. N. Télstoi in 1920 but was formally developed by Frank Lauren Hitchcock in 1941, The assignment problem, also known as the Hungarian method, was introduced by Harold Kuhn in 1955 and named based on the works of two Hungarian mathematicians, Denes Konig and Jeno Egervary. Cost-volume-profit (CVP) analysis. It is a mathematical model that evaluates the relationship among revenue, cost, and expenses to determine the break-even level and desired profit level of a business Economic order quantity (EOQ) model. It is an inventory model that is intended to minimize the ordering and carrying cost of an inventory. Decision theory. It is a systematic approach to making a decision from different alternatives under a particular decision-making environment. Regression analysis. It is a quantitative technique used in determining the relationshiy between the dependent variable and independent variable in terms of linearity anc strength.BS 6 seswcemer Scunce: A Quon Arnon 0 Decor Mane 6. Queuing theory. It is a quantitative study that examines every component of a queue o, waiting Line, including congestion and delays. rRTICERA 7 Program evaluation review technique/Critical path mee rating Miron” quantitative technique used in scheduling, organiZinBs 2% “heat interrelated activities of a particular project. 8. Probability concept. It is a quantitative technique desi8™ value of estimates in relation to the occurrence of an e¥er ned to determine the expected ASSUMPTIONS IN MANAGEMENT SCIENCE TECHNIQUES of assumptions when dealing with limiting the factors and parameters these assumptions do not make an sumptions is valid, provided that Almost all technical and academic fields make us a problem. The assumptions simplify the situation Py that affect a particular activity or phenomenon. However approach erroneous and the results questional the parameters are clearly defined. ble. The use of a For example, in the field of microeconemics, the law of demand states that the quantity ciemanded varies inversely with the price. This means that the demand for a product or service will increase when the price is low. This theory of demand holds true on the assumption that the other variables (e.g. income and consumer preference) are constant. The assumption that the income of the consumers remains constant simplifies the theory of demand. quantitative tool has assumptions as well. This means that ‘cannot be applied when its assumptions are violated. The complied with before a certain quantitative tool can be In management science, every a particular quantitative technique conditions or requirements must be fully used to make an analysis.Chapter Review pIscussION eR awe Define the following terms: Management science Mathematical model a ¢ <. Variables d. Parameters e, Algorithm {, Quantitative analysis approach State the nature of management science. Identify the steps in the quantitative analysis approach. Describe the different types of models. Discuss the limitations of management science. State the different quantitative techni ques used in mana gement science.Linear Programming: Graphical Method tearning Objectives Atthe end of this chapter, the student should be able to: explain linear programming; _ identify the parts of linear programming state the assumptions in linear programming, determine the feasible region; and few compute for the optimal solution using the graphical method. w OVERVIEW Linear programming is a quantitative technique used in properly allocating the resources of a business to maximize its profit or minimize cost. The term linear signifies the existence of a proportional relationship between variables, which can either be direct or inverse. A directly proportional relationship exists when an increase in one variable corresponds to an increase in another variable. An inversely proportional relationship exists when an increase in one variable results in a decrease in another variable or vice versa.0 ale a pay Sivan ot a muathennatioal anadet wh MeL hen deve i) fy penal related te Camnpuler proytamnuiny rags role Wat, Beane Joan Het af Toear progranimings protean prapertie ove ang are the The The objective oa i Ha Lawear progtaniny petive function M5, Problem, vt hee ia masiniive profil ac miaiiiice cost The tern prati AL Ue Feravencer anal the variable coat, The fern east simply refer Oe © bet vey Abo not included (nol Linetly related tothe revenge ane com Thy revenue The nent Hse cont tiyedt ev stant in relation to the changes in revenue and product and production. ‘The problem nit be exp Obie tive gy Hiv an equality nin, a linear progr ratrainty, Phere are constraints that restrict or limit the att, ritations may be in the form of plant cay Fe ment af ant capacity, avaitabilit a labality of mater Materials Phe limitati Presence of « abjeetive The Jor time a straints shoul not be violates) nun solution The con) direct labor oF pet in determining the op in equalities or Inequaliti Availability of alternatives. Since Uhe iuming problem, there are different alternative cou alive COUrSES of OF Himitations. must be expy hwo or more variables used wh developing a linear prog! ‘ition to choose from, The alternative courses of action may favor the selection of ction of one riable over anoth AL Lwo or more variables er or it may involve the mixtu ationship. This property means that the relationship of t p of the y; is considered linear and can be expressed in equalities 4 Linear mathematical rel Lconstraints must be in their first degree variables in linear programming objectives, functions, or inequalities, The fovel (4g). dA + 4B = 25) ASSUMPTIONS OF LINEAR PROGRAMMING sumption, There is certa inty that the objective function and the constraints sriod of the study, The mathematical equation that has been Certainty ai will not change during the pe developed should remain the same as well. y assumption, Proportionality exists among the variables in the objective For example, if one unit 20 kills of raw materials. Proportionalit of product requires 4 kilos of raw function and constrain materials, then producing five units requires ‘There is additivity in the mathematical model. This assumption activities is equal to the sum of the different individual activities. profit of a business and another product Additivity assumption. means that the sum of all product contributes M% to the en the total profit for the two products is P9. optimum solution may take the form of a fraction, not an integer programming problem For example, if one contributes a profit of 3, th Divisibility assumption. The necessarily an integer or a whole number, However, hhen a fractional form results in manufacturing a product. For example, will exist wl manufacturing three and three-fourths chairs is not possible.Cora 2) nest Peanainc. Gomer Merce $4 Bz © zero ativity assumption. The value of the decision variables should be pe nee jption is also known as logical constraint since 2 com «none pany cannot produce 3 Ti number of products. 1s 0FA LINEAR PROGRAMMING MODEL ear programming model has two main parts, namely, the objective function and the Alin t=. The objective function denotes the maximization of profit or minimization of cost o el introduced by the words “maximize” or “minimize.” The con: = i ds “subject to.” There are two types of constraints, namely, : he explicit constraint | the WO" . *vrlisit constraint. Explicit constraints are limitations that are expressed or stated in em Implicit constraints are implied limitations or non-negativity assumptions. These Ponts should not be violated. constrain oDS OF SOLVING A LINEAR PROGRAMMING PROBLEM linear programming problem may be solved by using either the graphical method or the gmplex method RAPHICAL METHOD The graphical method utilizes a two-dimensional graph to solve linear programming roblems. This method is used if the linear programming model consis riables. of no more than two The following are the steps involved in the graphical method: 1. Use letters to represent the unknowns or variables in the problem, If necessary, prepare a simple matrix to facilitate the formulation of the constraints Formulate the objective function and the constraints in equalities and inequalities Graph the constraints. If the lines intersect, solve for the coordinates of the intersec point. Determine the feasible region. fe aw Determine the optimum solution. ™ Formulate the decision based on the highest profit or lowest cos The feasible region contains all the points in the graph where the optimum solution can be found. It is also the region where the constraints are not violated. There are two methods for finding the optimal solution, namely, the isoprofit or isocost line method and the corner point method. In this book, the corner point method will be used.SS BS 22 soacssars Since: A Quorn Armour Bicone Mans Cm Maximization of Profit (Graphical Method) , elegant table Jenny Furniture Shop produces two types of tables: ar The table, whether agar or onlineyiioes thous sa epartments, namely, the assemby department and finishing department. Each elegant table require 8 hours of assembly wor}, and 4 hours of finishing tasks, Each ordinary table quires © POUT the assembly deparimer and 2 hours in the finishing department. Every product” period, the shop es set hours of assembly time and 200 hours of finishing time, The elegant fable contributes F700 to the company’s profit, while the ordinary table has # profit of 7500. programming, determi and an ordinary table ine the number of units Required. Using the graphical method of linear needed to be produced to maximize profits ing hours in the assembly and Answer. The constraint in this case isthe availability Of work y finishing departments. Applying the steps the number of units to be produced to maximize profits is determined as follows: “oblem, Step 7 Use letters to represent the unknown variables in the pr Let x = number of elegant tables to be produced be produced = number of ordinary tables to ‘Jitate the formulation of the constraints. | ier If necessary, prepare a simple matrix to fact Hours Required per Unit Available Hours x —_y— 6 480 ‘Assembly department 8 Finishing department 4 2 200 700 500 Profit Step 3 Formulate the objective function and the constraints in equalitis number of hours in the assembly and finishing departments may not excees respectively, the S shall be used to express the constraints Max profit: P = P700x + P500y 8x + by $480 4x + 2y $200 xy20 es and inequalities. As the d 480 and 200 hours, Subject to:CHAPTER 2 | Laas Procenmanc: Gearcar Menon 13) A sep 4 -— fh the constraints. In order to do this, sy to determine the intercept. ef the i 1s . he inequality must first be converted to an ror the first cohstraint: 8x + 6y S480, the equation will be: Bx + by = 459 ‘The intercept of this equation is determined as follows: [ Tix= 0, then y is 80, which is computed as follows: | [ Hy =0.then xis 60, which is computed | | as follows: 0 + = 0 | | & + 0 = ap | _ Se Lo % = 60 \ For the second constraint: 4x + 2y $ 200, the equation will be: ax + 2y = 200 ‘The intercept of this equation is determined as follows: ifx=0, then y is 100, which is computed | |" ty =0, then xis 50, which is computed as follows: | | as follows 0 + wy = 200 \ | a + 0 = 200 y = 100 | | x = 50 Insummary, the equation and the intercepts are: For equation 8x + 6y = 480, the intercepts or vertices are (0,80) and (60,0) For equation 4x + 2y = 200, the intercepts or vertices are (0, 100) and (50, 0).Fe BS U4 sewcewens Somer: A Quomnt Armano 10 Dros Ms Figure 21 presents the graph of the coordinates. he two lines intersect. Hence, there is a need to solve for the jinates are determined The graph shows that 1 i coorddindses of the point of intersection. By elimination rrocess, the coordi as follows’ a& + (by ax + 2, then deduct the second equation from the first to Multiply the second equation by climinate x, Afterward, solve for the value of y as follows: Bx + by f et Wy ay Substitute the value of y, cither to the first or second equation, to solve for the value of x. the value of x is determined as follows: Substituting the value of y to the first equation, Sx + by = 480 Sx + 640) = 480 x = 30 Thus, the coordinates of the point of intersection are (30, 40).Ciwrnin 2 | Ln Procenaanc: Guana Meno 15 FH ible region. There are five coordinates: xine the feasible region, There are five coordinates: (0,100, (0, 80), (0,0), (50, ), and sates time, one can hardly identify where the feasible rego wae nevi 20 ay. Will the feasible region be bounded by the fll Py ooking: the 8 lowing vertices? 1. (0, 100), (0, 80), and (30, 40) 2, (60,0), (60, 0), and (30, 40) 4, (0,100), (20,40), and (60, 0 4, (0,80), (30, 40), and (60, 0) 5, (0,80) (30, 40), and (60, 0) shasized that the feasible region i It is highly emphasiz sible Tegion is the area where the constraints are satislied. Thus, the coordinates atthe vertices, including that of the intersection point, shall be tested individually against all the constraints. To test these, the values of the coordinates are simply substituted to the constraints. If the coordinates violate one of the constraints, h sin snates will not form part of the feasible region _ The coordinates in the graph are as follows: (0, 100), (0, 80), (60, 0), (50, 0), and (30, 40) The constraints are: 8x + 6y < 43g 4x + 2 < 200 Coordinates (0, 100) First constraint; 8 + 6y << 4g9 80) + 6(100) < 480 600 < 480 As computed, the coordinates (0), 100) violate the first constraint since 600 is not lower than 480. In such a case, there is no need for the coordinates (0, 100) to be tested against the second constraint, Hence, the coordinates (0, 100) will not form part of the feasible region, Coordinates (0, 80) First constraint; 8 = + Gy =< 480 80) + 680) < 480 480 < 480 The coordinates (0, 80) do not violate the first constraint since 480 is equal to 480. These coordinates are then tested against the second constraint as follows: Second constraint: 4x + 2y << 200 40) + 280). < 200 160 < 20010 Murnane Au {damien Arcana ge Began Mani As the coords inaten (0, HO) as well Vive nos am vet! tran dtataans tat vtalateat by: the ee (NOY oe net vatater ani a thes tive stata, Hoy nba ferns part at (Be LE © sssaattanatn 4a OD Tel content tn "ey = nen 66) =O an. 4No ual 10 480. Howeye, Jat constraint since 480 1s f an follows: Vie cose ttinatio: (tO) ate nat vtole frvnt he secannnel contin UM abate tentent a wutsonntaint Nt 2Y She you) + 20) = 200 >40 200 se maiatied. Hence, the coordinates (60, 0) will not form Etvis tine: the aeconet canntraint ¢ IL the Cogseatinnates (0 0) pirat conmtrain: Be ty S480 (50) + G0) 480 400s 480 coordinates (50, 0) since 400 is lower than 480. Phe fest Himitation bs net violated by th tnat the second Limitation. ax ays 200 450) + 20) = 200 200s 200 os (50, 0). Thus, these coordinates shall Ieadall however be tested Second constraint ' The second Limitation is not violated by the coordinate be tneludedt as part of the feasible region. Coordinates (30.40) Firstconstraint 8+ by S480 80) + 640) s 480 480s 480 The first constraint is not violated. The coordinates (30, 40) shall be tested against the second constraint as follows’ dx + 2y Ss 200 430) + 240) < 200 200 s 200 Second constraint:Corn 2 | Leann Procanaic: Garman Mince 17 GF tne coordinates (20,40) do not violate any of the constraints, th ; pte region. At this point, the feasible region is bounded by the follec ae ee included in vr (30, 40) following vertices: (0, 80), ete 60.0 he shaded portion in Figure 2.2 is the feasible region. Aj i Th t violate any of the constraints. 8 NY coordinate located within such a does no! regio" 100 90 80 70 60 so 40 30 20 10 © 10 20 30 40 50 60 7 a0 90 100 | Figure 2.2 Step 6 1 Determine the optimum solution. The two methods for find: : 7 : i ling the optimum solution are the isoprofit or isocost line solution method and corner point solution method. In the fret method, a series of parallel lines will be drawn in the feasible re i gion until the highest profit or lowest cost is found. The second method is based on the mathematical theory behind linear programming in which the optimum solution lies at one of the corner points of the feasible region. This book illustrates the second method. Substituting the coordinates (0, 80), (50, 0), and (30, 40) in the vertices comprising the feasible region, the maximum profit is determined as follows: Vertices Max profit = P700x + = P500y (0,80) = 7000) + ~—-500(80)_- =~: 40,000.00 60, 0) = 70050) + ~~ 5000) 35,000.00 (30, 40) = 7000) + 50040) = 41,000.00 Step 7 ‘ Formulate the decision based on the highest profit or lowest cost. The optimum solution, therefore, is to produce 30 units of elegant tables and 40 units of ordinary tables to realize a profit of P41,000.00.=~ ZEB wesw Sou mer: A Quaat Argon 6 Dies Mun urchased by ABC Minimization of Cost (6 To operate the ni cently P' x e newly imported state-of-the-art machinery recently paste Company, two types of fuels are needed namely, Fuel A and Fuel 1% machine $e ciation, and requirements show that for every one hour of production Hime, CO anon ual A ‘oulls 6 units of chemical gas andl generates « specharical enetBY a ical poe s costs units of chemi is costs 320. In a similar manner, each gallon a a its Son Fitinber af his costs of Fuel Bem! Th i generates § horsepowe i : 300. The maxi units of suc bonepaen at Bee Se int to be emitted by such type of 's of such type of chemical gas allowed by the governme int te st 32 horsepower o} machinery is 30 units. The operating activities of the company require at least rsepower of mechanical energy per hour Required. Using the graphical m the rusian BF that are needed to operate the mai ossible cos beret m number of units of Answer. There are two constraints the maximu! ' . : «ver of mechanical energy. The chemical gas allowed to be emitted and the power of mi 8 steps involved are as follows: allons of Fuel A and Fuel B ethod, determine chine at the lowest P* in this case namely, required horse] blem. Step 1 Use letters to represent the unknown variables in the pro Let x = number of gallons of y= number of gallons of. Fuel A Fuel B he constraints. The atrix to facilitate the formulation of t] Sep 2 If necessary, prepare a simple ms matrix appears as follows: Units of Chemical Gas , Cost emitted Mechanical Energy Cost x 6 8 7320.00 y 10 8 300.00 30 32 itep 3 nstraints in equalities and inequalities. The Formulate the objective function and the co voblem used the words “maximum” and “at least.” The former indicates that the required units quantities should not be more than the given number, and the latter means that the requiredsa not be tewe than the given number. Hence, s will be use Ie later ‘d for the former and 2 will Min cost: C= 320x + P300y Subject to: 6x + 10y $30 Bx + By 232 xy20 sien | te hr the constraints. The inequality must first be converted noukd be determined before graphing the constraints. gntereeP to an equality, and the For the first constraint: 6x + 10y s 30, the equation will be: 6x + Wy = 30 ‘the intercept of this equation is determined as follows iy x =0, then y is 3, which is computed | | Wyo thenxis5, which iscompured as follows: uted | as follows: | o + Wy = 30 | 6x + 0 = 30 | y= 3 | x = 5 | —__ 2 _| For the second constraint: 8x + 8y 2 32, the equation will be: & + By = 32 ‘The intercept of this equation is determined as follows: Ifx=0,then y is 4, which is computed | | If y=0,thenx is 4, which is computed | as follows: | as follows: | 0 + by = 32 \ | Bx + 0 = 32 | yo 4 x In summary, the equation and the inter, pts are: For equation 6x + 10y = 30, the intercepts or vertices are (0, 3), (6, 0) For equation 8x + 8) 32, the intercepts or vertices are (0, 4), (4, 0).BRS 20 Mewcomes Samet: A Quummame Arena 10 Deco Maan Figure 2.3 pre: igure 2.3 presents the graph of the coordinates. Figure 23 determine the coordinates of the point of aneed to mined as follows: ‘dinates are deter! 30 32 The two lines intersect: hence, there is -ess, the coor intersection. By elimination pro“ ox + Wy = & + 8y Jo eliminate x, multiply the first equation by 8 and the second equation by 6. Then, deduct the second equation as follows: asx + S0y = 240 4sx_+ 48y 192 32y 48 = 15 .e first equation to determine the value of x as follows: Substitute the value of y to th 6x + Wy = 30 6x + 1075) = 30 = 25 x The coordinates of the point of intersection, then, are (2.5, 1.5).CCuaree2| Leas Phoceamans: Granacar Me Be mo 2 BS BA ee ble region. The coordinates of the vertices, including the intersection BoP cernine the oo 5, 15), 4 0), and (5,0). These coordinates will be tested to identify which 0 4), 03 on pot re sataty the two constrain them (0.4) coordinate First constraint! 6x. += Wy S30 60) + 104) < 30 4 < 30 dinates (0,4) violate the first constraint; hence, they do not have to be tested against coe tataint anymore. These coordinates shall not orm part ofthe feasible region con the ser coordinates 0,3) First constraint; = 6x + © Wy < 39 60) + 108) < 30 3s 30 ‘te coordinates (0, 3) satisfy the first constraint, Hence, they shall be tested against the cond constraint as follows: ’ Secondconstraint! 8x + sy 2 3 80) + 88) 2 2 M 2 32 This time, the coordinates (0, 3) violate the second constraint becaust 24 is not greater than 32. Hence, they will not form part of the feasible region, Coordinates (25, 1.5) First constraint: & + Wy < 30 625) + 1005) s 30 Bb + Gb < 3 3 << 30cs ox sFE n aS Meowconant Somnct: A Quomnarnt Armano 10 Decision Maen The coordinates (2.5, 1.5) do not violate the first constraint. Hence, they shall be «, against the second constraint as follows: Second constraints 8x + = By B32 825) + 85) 2 32 2 + 12 2 32 32 32 The coordinates (2.5, 1.5) satisfy the two constraints. Hence, they will form part o¢ the feasible region Coordinates (4, 0) First constraint: 6x + Wy < 30 64) + «100) -s 30 < 30 4 The coordinates (4, 0) satisfy the first constraint. Hence, they shall be tested against 1, second constraint as follows: Second constraint 8 + Sy 2 2 sa) + 80) 2 2 oe => m2 The second constraint is not violated by the coordinates (4, 0). Thus, they will form part o¢ the feasible region. Coordinates (5, 0) First constraint: ox + Wy < 30 65) + 100) < 30 < 30 30 The coordinates (5, 0) do not violate the first constraint because 30 is equal to 30. They shall be tested against the second constraint as follows: Second constraint: 8x + 8y 2 32 86) + 80) 2 32 40 2 32 The coordinates (5, 0) do not violate the second constraint as well because 40 is higher han 30. These coordinates will also form part of the feasible region. At this time, the coordinates of the vertices comprising the feasible region are (2.5, 1.5), (4, 0) id (5, 0). The shaded portion of Figure 2.4 shows the feasible region.ZA CCoaran 2 | Lntas Programas: Guaneca Memo 23 FAR Figure 2.4 sep 6 | Determine the optimum solution. By substitutin, ig in the objective function the inate of the vertices located at the feasible region, the com i on'thelcoerdinates 'putation will appear as follows: Vertices Mincost = F320; + rgagy 23,15) 3202.5) + 30005) =~ P1250.00 9 3204) + 3000) =~ P1,280.00 60) = 3205) + 3000) = er e000 Step7 Formulate the decision based on the highest profit or lowest cost. Since the objective function is to minimize the cost, the decision, then, is to use 2.5 gallons of Fuel A and 15 gallons of Fuel B for the optimum cost of 1,250.00, ‘SPECIAL CASES IN LINEAR PROGRAMMING There are four special cases that may arise when solving linear programming proble: using the graphical method, namely, infeasibility, unboundedness, redundancy, and altern optimal solution.ES (HAPTER 9 cost-Volume-Profit (CVP) Analysis _zorning Objectives nd of this chapter, the student should be able to cientity the different elements that influence profit discuss break-even analysis; and perform a CVP analysis ovERVIEW v economic decisions and actions of management are directed toward the realization of However, there is a need for management to know at what sales level the business starts a profit nor incurs a loss n profit, begins to incur a loss, and neither realizes ihe following internal elements affect the profitability level of a business: 1 Prices of the product sold Volume of sales Variable cost per unit 4 Fixed cost » Product mix manager must understand the interactions and relationships of the above-mentioned ents with each other so that correct economic decisions can be madesr Seances A Quavaiianin Arenuaen 1 Deceains Maen BS 218 Mow ASSUMPTIONS OF CVP ANALYSIS A CVP analysis becomes effective and mei following assumptions are present 1 aningful in making economic deci sions if 4, All costs are classified as fixed costs and variable costs, 2, ‘The fixed cost remains constant within the relevant range. 3. The variable cost changes in proportion to the changes in activity levels (e volume, 4. The product mix is considered constant 5. Inventories do not significantly change. 6, The business operates under normal operating conditions Fixed cost is a cost that remains constant in total but changes inversel unit cost. Examples of fixed cost include the salaries of employees, rent, other hand, variable cost is a cost that changes in total but remains fixed in unit cost. Variebe, cost includes the cost of materials used, cost of labor, and manufacturing supplies. The cost that carries the behavior of both the fixed and variable costs is called the mixed cost. A Cvp analysis, however, classifies costs into fixed and variable costs, Hence, the mixed cost must be split into its fixed and variable components. ly to the volume of and insurance. On the CVP ANALYSIS CVP analysis is a quantitative approach that determines the sales volume and mix of products required to achieve the desired profitability level of a business. A special case of CVP is the break-even analysis. Break-even (BE) analysis is a tool that determines the point at which the total costs and revenue are equal. The break-even point can be determined either with the aid of a graph or using a formula. The margin of safety is the difference between the actual or targeted sales level and the break-even sales. 1. BE formula: a. In terms of units or quantities Total fixed cost BE = “Contribution margin per unit b. In terms of pesos or amount Total fixed cost BE Contribution margin ratioCanes 9 | Cos Venn Proes Pron (WF) Avine 219 RS contribution margin (CM) formula: Ss cM per unit = Unit selliny a 'B Price ~ Unit variable cost CM per unit cM ratio = $$ b. Unit selling, price |. pE for multi-products formula: |. In terms of combined units Total fixed cost BE - Weighted average contribution margin per unit uni b. Interms of combined pesos Total fixed cost BE = a Weighted average contribution margin ratio average contribution margin (WACM) formals: 4, Weighted a. WACM per unit = {Unit * No. of units per mix| + [Unit CM » Unit per mix} a wees = No. of units per mix] + (Unit CM * Unit per sv) Total weighted sales in pesos 5. Sales at the desired profit level formula: . Total fixed cost + Desired profit a. Sales (units) CM per unit Total fixed cost + Desired profit CM ratio b. Sales (pesos) = 6. Margin of safety formula: Margin of safety = Actual/targeted sales - BE salesfe BZ 220 Meecoser Somer: A Quermane mm 19 DeosOn Mane Princess Company presents the following information Sales revenue P3,000,000, Total variable cost PLS00.000 Total fixed cost 800,000 Sales price per unit Pao Pago Variable cost per unit Required. Perform the following: 1. Construct a BE chart. 2. Compute the BE in units and pesos. 3. Determine the margin of safety. Answer 1. The break-even chart appears as follows Profit area Cost in Thousand Pesos 2000 2500 000 ° so 1.0001 500 Sales Volume in Thousand Pesos To construct a BE chart, the data needed are the sales, fixed costs, and variable costs, The following procedures must be observed: 1, Designate the horizontal line (x-axis) as the sales volume in pesos or in units with appropriate intervals. Designate the vertical line (y-axis) as the cost with marked intervals: Draw the fixed cost line parallel to the x-axis. The line should start from the y-axis and run to the right side of the graph. Draw the total cost line starting from the point of origin of the fixed cost line v 5. Draw the revenue line starting from the zero point.yr rn 9 | Coit Vouna Pn (CWP) ven 221 BS, pe Line using an hine starting from the point where the revenue and cost et, The line should run downward and leftward until it meets the x-axis reveals that re total revenue of 12,000,000 is equal to the total cost of 1, the business incurs losses, while above this point, it realizes profit anpating the BE units, the CM per unit is first computed as follows CM per unit = Unit selling price - Unit variable cost = 400-240 = Pi60 spits is determined a lle ip. 4 he = 5,000 units ste the BE in pesos, the contribution margin ratio is first determined as follows: 5 cor , CM ratio = _Unit selling price ~ Unit variable cost_ Unit selling price = M022 400 = 040 or 40% she BEin pesos is then computed as follows: | Total fixed cost BE = Oe Contribution margin ratio _800,000_ ~~ 00 = 2,000,000 To prove that the BE level of the business is 72,000,000 or at 5,000 units, the following, computation 1S presented: Total revenue ~ Fixed cost - Variable cost (5,000 units * 400) ~ P8O0.000 ~ (5,000 units * 240) 7,000,000 ~ 800,000 - 1,200,000 0 BE uRE 222 Mewes Sone A Quan Arm 9 Drs Ma realizes no profit or incurs no loss at the 2,000,000 sales love, The busines: is a change, however, in the unit sales price, unit variable cost, or fixed cost, the jj also change. A business with a 20% contribution margin requires an increase of © OF PS 4 for ¢ proposed increase in fixed cost (PI + 0.20 = P'5) Answer 3. The margin of safety is determined as follows Margin of safety = Actual/targeted sales ~ BE sales = 3,000,000 - 2,000,000 = 71,000,000 ‘The margin of safety is computed as follows: = Actual/targeted sales - BE sales (P3,000,000/P400) - 5,000 = 2,500 units pms Hyzel Company has the following information: Margin of safety Unit selling price Product X 7360 Product Y 220 Unit variable cost Product X £200 Product Y 140 Product Mix Product X 1 Product Y z Fixed cost 800,000 Required. Determine the following: 1. BE point in units BE point in pesos Expected sales level in pesos for a desired profit of P900,000 3. Answer 1. When there are multiple products, there is a need to determine first the weig! In this case, the sales mix ratio is 1:2 for products X and Y, respectively. hted CM.Corot 5 | Come Vase OM has 2 unit is computed as follows cM per eda unit selling price 3g. — Pract Unit variable cost 0, a ™ 160 — nit Per mix] + (Unit CM xy, pet 2 (160 * 1) + (80 x 2) re :hetcal BE point in combined units s computed a follows ot BE = —l0tal fixed cost oe ee WACM per unit £00,000 _ 320 = 2,500 units ine the number of units to breal he unit sales ratio. Hence, Product X (2,500 x 1) Product ¥ (2,500 x 2) eter™! ik-even, the hy Bi dtol wih ypothetical numbers of un 2,500 units 5,000 units 3, The WACM ratio is computed as follows: f2- ca [Unit CM , * No. of units per mix] + [Unit CM x No. of wyac per unit = ‘Total weighted sales in pesos (160 x 1) + (80 x 2) = EB 0x2 © 3601) + 2202) 320 units per mix] 800 0.40 or 40% The WACM ratio may also be computed as follows: Sales mix rate x CM ratio WACM ratio Product X (P360 x 1) 360 (360/800) 08 a : S Product Y (P220 = 2) 440 (440/800) 055 x Total SsCarney | i Fo OM A "Mss ocd OME por aunt fs ainypaitest as fallanea | wee Product x Peuduet y Uvait wotttiay, porto ne v0 Dicvactildi com 200 Wo re a an [Unit OM Noo of anite por Wis) HTUnit ONL fine sn = dens aos? ; = mw {ac per anit Per miyy si point 8 SONNEI HE is compute oe fetlagy (he hypotheties Wotal fixed cont We Whe per unit sO0,000, w20 = 2.500 unite ine the number oF wills 1 bteakceven, the hypotheri a numbers of units are fo determine Ure a cas | ipa aah unit sales ratio. | Product X 2.500 5 1) Prodict Y (2,500 * 2) 10 units 5,000 units ACM ratio is computed as follows _ Phe WACM 1 2. [Uni CM * No.of units per mix] + [Unit CM No, of an WACM per unit sales in pesos Total weighted s tamix} (160 * 1) + (BO x 2) (B60 <1) # (220 x 2) 320 800 040 or 40% ‘The WACM ratio may also be computed as follows: 3 Sales mix rate CM ratio= _WACMratio Product X (P360 * 1) 360° (360/800) 045 x 160/360 7] Product Y (F220 x 2) 440 (440/800) 0.55 x 8/220 = 9.09 Total Oat 040ZS 14 Nos Sn A Quan Arn Os Man The BE point in combined pesos is computed as follows Total fixed cost ~ WACM ratio 800,000 040 = 2,000,000 Topprove tat the hypothetical BE in units is 2500, the following computation is m BE = Total revenue - fixed cost - variable cost (2,500 units * 360) + (5,000 units * 220)] - [800,000 + (2,500 units » rar, + (5,000 units * P140)] (900,000 + 1,100,000) ~ (800,000 + 500,000 + 700,000) 2,000,000 ~ 2,000,000 = 0 rhe BE point in pesos for product X and product Y is as follows: Product X (2,000,000 « 0.45) 900,000 Product Y (1P2,000,000 x 0.55) 1,100,000 2,000,000 Answer 3: The expected sales volume in pesos for 2 desired profit of 900,000 is determined a follows __Total fixed cost + Desired profit Sales (pesos) = CM ratio 800,000 + 900,000 040 = 4,250,000 ‘he ?'.250000 allocated to products X and Y based on their sales mix ratio as follows Product X (P4,250,000 * 0.45) 1,912,500 Product ¥ (P4,250,000 0.55) 2,337,500 Product X (P1,912,500 * 360) Product ¥ (P2,337,500 + 220) 10,625 unitsCuore 9 | Cos-Vouna- Prom (VP) Avis 225 ne desired profit of 900,000 is at the 4,250,000 sales level, the computation at fo” ws of oll? pti cot % revenue ~ Fixed cost - Variable cost ” profit : 4,250,000 ~ {9°800,000 + (5,312.5 units « 7200) + (10,625 units x P140)] w 4,250,000 — (800,000 + 1,062,500 + 1,487,500) 4,250,000 - 3,350,000 2 900,000 s