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. Discuss possible problems in using quantitative
analysis
5. Perform a break-even analysis
 Chapter Outline
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 The Quantitative Analysis Approach
1.4 How to Develop a Quantitative Analysis Model
1.5 The Role of Computers and Spreadsheet Models in
the Quantitative Analysis Approach
1.6 Possible Problems in the Quantitative Analysis
Approach
1.7 Implementation — Not Just the Final Step
 What is Quantitative Analysis?

Quantitative analysis is a scientific approach to

managerial decision making where by raw data are
processed and manipulated resulting in meaningful
information

Quantitative Meaningful
Raw Data Analysis Information
 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 in Jeddah today
– The brand of cereal children eat for breakfast
– The type of book taken out of the library by an adult
 Answer the question

In analyzing a problem you should normally study

a. The qualitative aspects
b. The quantitative aspects
c. Both a and b
d. Neither a nor b

The answer is c
 Answer the question

Quantitative Analysis is
a. A logical approach to decision making.
b. A rational approach to decision making.
c. A scientific approach to decision making.
d. All of the above.

The answer is d
 The Quantitative Analysis Approach
Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Figure 1.1 Implementing the Results

 Defining the Problem
 It is the first step in the Quantitative
Step 1: Problem identification: Analysis Model QAM

 Develop a clear and short statement for the problem at hand.

 Yes:
This is the most important and difficult step in QAM.
 In other words:
You have to go to the warning signs and
identify the true reasons for the problem at hand.

 Example for that:

Selecting those problems whose solutions have
a great effects in Increasing Profits or Reducing Costs.
 But if the problem at hand is difficult to quantify then:
 It may be necessary, you have to identify:
Specific and Measurable Quantities or Objectives to define
the problem at hand.
 Developing a Model
Quantitative analysis models are realistic, solvable,
and understandable mathematical representations
of a situation
$ Revenues

X
Y=b

$ Sales

There are different types of models

Scale Schematic
models models
 Developing a Model

• Models generally contain variables controllable and

uncontrollable “parameters”
• Controllable variables are generally the decision
variables and are generally unknown
Ex: how many inventory items to order. How many should we
sell to get profit?
• Parameters are known quantities that are a part of
the problem
Ex: salary of sales forces. The selling price, fixed cost, variable
costs…etc
 Acquiring Input Data

Input data must be accurate – GIGO rule

Garbage
In
Stands for "Garbage In, Process
Garbage Out." GIGO is a 
computer science
Garbage
Out
 acronym that implies bad 
input/data will result in
bad output.
Data may come from a variety of sources such as
company reports, company documents, interviews,
on-site direct measurement, or statistical sampling
 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
 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
 Analyzing the Results
Determine the implications of the solution
– Implementing results often requires change in an
organization
– The impact of an actions or changes needs to be
studied and understood before implementation

Sensitivity analysis determines how much

the results of the analysis will change if
the model or input data changes
 Sensitive models should be very thoroughly
tested
 allows a manager to answer the "what if"
questions.
How To Develop a Quantitative Analysis Model

 An important part of the quantitative

analysis approach
 Let’s look at a simple mathematical
model of profit

Profit = Revenue – Expenses

 How To Develop a Quantitative Analysis Model
Profit = Revenue – Expenses

Revenue = (Selling price per unit) x (number of units sold)

= s* X

Expenses = Fixed cost + Total Variable cost

=[Fixed cost + (Variable costs per unit)*(number
of units sold]
= f + v*X

Profit = s*X – (f + vX)

Profit = sX –f – vX
How To Develop a Quantitative Analysis Model
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
How To Develop a Quantitative Analysis Model
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

The parameters of this model

are f, v, and s as these are the
inputs important in the model
The decision variable of
interest is X
 Pritchett’s Precious Time Pieces
The company buys, sells, and repairs old clocks.
Rebuilt springs selling 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 per unit

Number of spring sets sold = X
Profits = s*X – f – vX
1. If sales (X) = 0, profits =
2. If sales = 0, profits = [(10)*(0) – 1,000 – (5)*(0)]
= 0 - 1,000- 0
Profit = -$1000
 Pritchett’s Precious Time Pieces
Companies are often interested in their break-even
point (BEP). The BEP is the number of units sold
that will result in $0 profit.

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

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
 Models Categorized by Risk

• Mathematical models that do not involve

risk are called deterministic models
– We know all the values used in the model
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
 Profit = sX – f – vX

Answer the question

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 40 shirts, what will her total revenue be? s*X = 15 * 40 = $600
b) What will her total variable cost be? = v*x = $320 (8x40)
c) How many shirts must Gina sell to break even? What is the total revenue for
this? Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
Selling price= $15
Fixed Cost = $350 BEP= 350/15-8
BEP = 350/7 = 50 units
Variable cost = $8 BEP=50 units of shirts
Profit= (s*x)-f-vx Profit= 15(50)-350-(8*50) = 750-350-(400)
=0
 Assignment 1

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?
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?
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?
 Answer the question
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?

Profit = sX – f – vX

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