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An Introduction To Business Decision Modelling

An Introduction To Business Decision Modelling. Chen Zhimin( 陈智民 ) School of Management Shenzhen University Office: 文科楼 2403 Tel: 26534104(O) 13902972552(Mobile) Email: chenzm@szu.edu.cn. 1. The Structure of Linear Models.

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An Introduction To Business Decision Modelling

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  1. An Introduction To Business Decision Modelling Chen Zhimin(陈智民) School of Management Shenzhen University Office: 文科楼2403 Tel: 26534104(O) 13902972552(Mobile) Email: chenzm@szu.edu.cn

  2. 1. The Structure of Linear Models • The general expression for a straight line: y=a+bx • y and x: dependent /independent variables of interest • a and b: constants, coefficients, parameters • a: Intercept--- y=a+b(0)=a • b: Slope (Gradient) b=the change in y/unit change in x =y/ x

  3. Example: y=3+2x • Intercept: a=3 • Slope: b=y/ x=2 • Shifts of a straight line • Changes in the intercept • y=7+2x • y=-2+2x • Changes in the slope • y=3+5x • y=3+1x

  4. Two fundamental types of shifts of straight line: • Parallel shift: changes in the intercept • Pivotal shift: changes in the slope

  5. Break Even Analysis • A company/firm: • Make a single product • Capacity: 150 • Price: 20 • Fixed cost: 500 • Variable cost: 15 • Find Break-Even Point

  6. Production Potential • 0-150 units • Revenue Consideration • Total Revenue(TR) • TR=pq • p ----selling price/unit • q ----quantity sold • Example: TR=0+20q (comparison with y=a+bx) • Average Revenue(AR) • AR=TR/q=pq/q=p

  7. Marginal Revenue(MR) • MR=(the changes in TR)/(a unit changes in q)= = TR/ q • Cost Considerations • Fixed Cost(FC) • Irrespective of how many units of output are produced: annual rental charges, management cost,.. • Total Variable Cost(TVC) • TVC=VCq • VC: variable cost per unit: labour/material payment

  8. Total Cost(TC) • TC=Fixed Cost +Total Variable Cost =FC+VCq • Example: TC=500+15q • (compared with y=a+bx) • Average Cost(AV) • AV=TC/q • Marginal Cost(MC) • MC= TC/ q

  9. Break Even Analysis • Diagram 1.4 • System of linear equations: TR=0+20q TC=500+15q TR=TC (Break Even) • Break Even Solution • To scan Table 1.2 • To read Diagram 1.4 • To solve the system of linear simultaneous equations

  10. The rule to write the system of linear equations: • The unknowns have been written in a specific , consistent order in each equation • All terms involving unknowns have been taken to the Left Hand Side (LHS) of each equation • All constants are taken to the Right Hand Side (RHS) of each equation • The coefficients of each unknown are carefully identified in each equations, including 0 and 1 • 1TR+0TC-20q=0 • 0TR+1TC-15q=500 • 1TR-1TC- 0q=0

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