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Introduction to

Introduction to . Decision Science. Overview Everyday specific businesses decide how much to sell of various types of products they make, how much labor and capital to employ, how many units to ship by train and how many by plane. There are other decisions as well.

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Introduction to

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  1. Introduction to Decision Science

  2. Overview Everyday specific businesses decide how much to sell of various types of products they make, how much labor and capital to employ, how many units to ship by train and how many by plane. There are other decisions as well. In this course we will focus mainly on those decision that have a quantitative solution. We will spend time applying mathematical and statistical techniques to aid us in finding a solution. The computer software that comes with the textbook, and sometimes Microsoft Excel, will be utilized in seeking solutions to problems that folks in a business setting face on a day to day basis.

  3. Models Often we will build a model of the decision process. There are some items in that process for which we have no control over and must merely take as a given piece of information in out work. Other items will be under our control and we have to determine appropriate usage for these items. Let’s consider an example of a firm that would like to maximize profit when selling a single type of product. The primary decision the firm must make is how many units to sell. Let’s assume the price of the product is determined by forces outside the firm and the firm is thus a price taker.

  4. Profit In general profit = revenue minus cost. In some situations we might have profit =PX – (F + VX), Where P = price per unit, X = the number of units sold, F = fixed cost of production, VX = the variable cost of production, where V is the variable cost per unit, also out of the control of the firm.

  5. Let’s take a specific example, where P = 10, F = 1000 and V = 5. Then Profit = 10X – (1000 + 5X) = 5X – 1000. Now we can play scenario analysis. If X = 1, profit = - 995, If X = 2, profit = -990, and so on. What X makes profit = 0? Set 5X – 1000 = 0 and solve for X -> X = 200! In general we say the quantity that makes profit = 0 is the breakeven quantity.

  6. Before we had profit = PX – (F + VX) and so in general terms the breakeven quantity can be found by setting profit equal to zero and by algebra solve for X: PX – (F + VX) = 0, or (P - V)X = F, or X = F/(P - V). So the breakeven quantity equals the fixed cost divided by the term unit price minus unit variable cost. As we observe the results of our model we should check the outcomes to make sure they seem to correspond with reality. In fact, in the model we just explored in order to maximize profit the firm should continue to expand output. This may not be realistic beyond current productive capacity.

  7. Computer notes

  8. Often in the course we will use the software that came with the book. See appendix D page 712 in the book and we will begin to use QM for Windows in the class. We will also find the use of Microsoft Excel useful this semester. Hey, I am note an Excel expert. I use it to do things I do. I have to learn along the way. One thing I learned in Excel is that when you type in a formula in a cell you start with an equal sign and do your formula. Then when you hit the enter key the cell changes to the numerical value you want. If you touch the cell again you still see the number, but up in the formula bar you see the formula. If you want to check all your formulas at once you can hit control and ` (called the grave accent key – just to the left of the key 1 on my machine) to see all the formulas in the cells. Hit control and ` to get back to seeing results in the cells.

  9. Here is what Microsoft Excel looks like. Using Excel is kind of a drag because you have to type everything. QM for Windows will have already done some of the work. Well, here I explored and made X = 1000. Profit is then 4000.

  10. Set cell to B18 To value 0 By changing cell B12 To do breakeven analysis, go up to tools and scroll to Goal Seek. It just so happens I had the curser in cell B12 and that is why it is highlighted on the screen – don’t worry. Here Excel puts in values in cell B12 until cell B18 is zero. (B18 is set to zero in breakeven, but you could make it other values if you like)

  11. This is the result when you hit the OK button in Excel as seen on the last screen.

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