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# Chapter 1

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### Chapter 1

1. 1. Chapter 1: Introduction to Managerial Decision Modeling © 2007 Pearson Education
2. 2. 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
3. 3. 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
4. 4. 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
5. 5. 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”
6. 6. 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
7. 7. Steps in Modeling
8. 8. 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
9. 9. 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%
10. 10. Example Model: Break-Even Analysis Profit = Revenue – Costs Revenue = (Selling price) x (Num. units) Costs = (Fixed cost) + (Cost per unit) x (Num. units)
11. 11. The Break Even Point (BEP) is the number of units where; Profit = 0, so Revenue = Costs BEP = Fixed cost (Selling price) – (Cost per unit)
12. 12. Possible Problems in Developing Decision Models  Defining the Problem • Conflicting viewpoints • Impact on other departments • Beginning assumptions • Solution outdated
13. 13. 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
14. 14. 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