Chapter 1: Introduction to Managerial Decision Modeling Jason C. H. Chen, Ph.D. Professor of MIS...
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Chapter 1: Introduction to Managerial Decision Modeling Jason C. H. Chen, Ph.D. Professor of MIS School of Business Administration Gonzaga University Spokane, WA 99223 [email protected]
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Transcript of Chapter 1: Introduction to Managerial Decision Modeling Jason C. H. Chen, Ph.D. Professor of MIS...
Chapter 1:Introduction to Managerial
Decision Modeling
Jason C. H. Chen, Ph.D.Professor of MIS
School of Business AdministrationGonzaga UniversitySpokane, WA 99223
Dr. Chen, Decision Support Systems 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
Dr. Chen, Decision Support Systems 3
Types of Decision Models
• Deterministic Models
Where all the input data value are known with complete certainty
• Probabilistic ModelsWhere some input data values are uncertain
Dr. Chen, Decision Support Systems 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
Dr. Chen, Decision Support Systems 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”
Dr. Chen, Decision Support Systems 6
Steps in Decision Modeling
1. FormulationTranslating a problem scenario from words to a mathematical model
2. SolutionSolving the model to obtain the optimal solution
3. Interpretation and Sensitivity AnalysisAnalyzing results and implementing a solution
Dr. Chen, Decision Support Systems 7
Steps in Modeling
Dr. Chen, Decision Support Systems 8
Example Model: Tax Computation
Self employed couple must estimate andpay 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
Dr. Chen, Decision Support Systems 9
Tax Brackets
Percent of Taxable Income Taxable Income up to $14,600 10%$14,601 to $59,400 15%$59,401 to $119,950 25%
Go to file 1-1.xls
Dr. Chen, Decision Support Systems 10
Millers' Tax Computation
Known Parameters
Retirement Savings % 0.05
Maximum savings 4000
Personal exemption 3200 per person
Standard deduction 10000
Tax rates 0.1 $1 to 14600
0.15 $14,601 to 59400
0.25 $59,401 to 119950
Variables
Sue's estimated income
Rob's estimated income
Tax Computation
Total income =B13+B14
Retirement savings =MIN(B4*B17,B5)
Personal exemptions =2*B6
Standard deduction =B7
Taxable income =MAX(0,B17-SUM(B18:B20))
Tax @ 10% rate =B8*MIN(B21,D8)
Tax @ 15% rate =IF(B21>D8,B9*(MIN(B21,D9)-D8),0)
Tax @ 25% rate =IF(B21>D9,B10*(MIN(B21,D10)-D9),0)
Total tax =SUM(B22:B24)
Estimated tax per quarter =B25/4 file 1-1.xls
Tax Computation
Total income $85,000.00
Retirement savings $4,000.00
Personal exemptions $6,400.00
Standard deduction $10,000.00
Taxable income $64,600.00
Tax @ 10% rate $1,460.00
Tax @ 15% rate $6,720.00
Tax @ 25% rate $1,300.00
Total tax $9,480.00
Estimated tax per quarter $2,370.00
Variables
Sue's estimated income $45,000.00
Rob's estimated income $40,000.00
Dr. Chen, Decision Support Systems 11
Example Model: Break-Even Analysis
Profit = Revenue – Costs
Revenue = (Selling price) x (Num. units)
Costs = (Fixed cost) +
(Cost per unit) x (Num. units)
Dr. Chen, Decision Support Systems 12
The Break Even Point (BEP) is the number of units where;
Profit = 0, so
Revenue = Costs
BEP = Fixed cost
(Selling price) – (Cost per unit)
Go to file 1-2.xls
Dr. Chen, Decision Support Systems 13
Bill Pritchett's Shop
Known Parameters
Selling price per unit 10
Fixed cost 1000
Variable cost per unit 5
Variables
Number of units, X
Results
Total revenue =B4*B9
Fixed cost =B5
Total variable cost =B6*B9
Total cost =B13+B14
Profit =B12-B15
Bill Pritchett's Shop
Known Parameters
Selling price per unit $10.00
Fixed cost $1,000.00
Variable cost per unit $5.00
Variables
Number of units, X 1000
Results
Total revenue $10,000.00
Fixed cost $1,000.00
Total variable cost $5,000.00
Total cost $6,000.00
Profit $4,000.00
Bill Pritchett's Shop
Known Parameters
Selling price per unit $10.00
Fixed cost $1,000.00
Variable cost per unit $5.00
Variables
Number of units, X 200
Results
Total revenue $2,000.00
Fixed cost $1,000.00
Total variable cost $1,000.00
Total cost $2,000.00
Profit $0.00
Go to file 1-2.xls
Dr. Chen, Decision Support Systems 14
Possible Problems in Developing Decision Models
Defining the Problem
• Conflicting viewpoints
• Impact on other departments
• Beginning assumptions
• Solution outdated
Dr. Chen, Decision Support Systems 15
Possible Problems inPossible Problems in Developing Decision ModelsDeveloping Decision Models
Developing a Model
• Fitting the textbook models
• Understanding the model
Acquiring Input Data
• Using accounting data
• Validity of data
Dr. Chen, Decision Support Systems 16
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
