Managerial decision modeling with spreadsheets by stair render chapter 01

Chapter 1:
Introduction to Managerial
Decision Modeling

© 2007 Pearson Education


What is Decision Modeling?
A scientific approach to managerial decision making
•

The development of a (mathematical) model of a real-world scenario

•

The model provides insight into the solution of the managerial problem


Types of Decision Models
•

Deterministic Models

Where all the input data value are known with
complete certainty
•

Probabilistic Models
Where some input data values are uncertain

Quantitative vs. Qualitative Data
The modeling process begins with data

•

Quantitative Data

Numerical factors such as costs and
revenues
•

Qualitative Data

Factors that effect the environment which are
difficult to quantify


Spreadsheets in Decision Making
•

Computers are used to create and solve models

•

Spreadsheets are a convenient alternative to specialized software

•

Microsoft Excel has extensive modeling capability via the use “add-ins”

Steps in Decision Modeling
1.

Formulation
Translating a problem scenario from words to a mathematical model

2.

Solution
Solving the model to obtain the optimal solution

3.

Interpretation and Sensitivity Analysis
Analyzing results and implementing a solution


Steps in
Modeling


Example Model: Tax Computation
Self employed couple must estimate and
pay quarterly income tax (joint return)
•

Income amount is uncertain

•

5% of income to retirement account, up to $4000 max

•

Personal exemption = 2 x $3200 = $6400

•

Standard deduction = $10,000

•

No other deductions


Tax Brackets
Taxable Income
up to $14,600
$14,601 to $59,400
$59,401 to $119,950

Percent of
Taxable Income
10%
15%
25%


Example Model: Break-Even Analysis

Profit = Revenue – Costs
Revenue = (Selling price) x (Num. units)
Costs = (Fixed cost) +
(Cost per unit) x (Num. units)


The Break Even Point (BEP) is the number of units where;
Profit = 0, so
Revenue = Costs
BEP

=

Fixed cost
(Selling price) – (Cost per unit)


Possible Problems in
Developing Decision Models


Defining the Problem
•

Conflicting viewpoints

•

Impact on other departments

•

Beginning assumptions

•

Solution outdated


Possible Problems in
Developing Decision Models




Developing a Model
•

Fitting the textbook models

•

Understanding the model

Acquiring Input Data
•

Using accounting data

•

Validity of data


Possible Problems in
Developing Decision Models


Developing a Solution
•

Hard to understand mathematics

•

Limitations of only one answer



Testing the Solution



Analyzing the Results



Implementation