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 Formulation Translating a problem scenario from words to a mathematical model Solution Solving the model to obtain the optimal solution 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 = 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Models  Defining the Problem • Conflicting viewpoints • Impact on other departments • Beginning assumptions • Solution outdated Possible Problems in Developing Decision Models   Developing a Model • Fitting the textbook models • Understanding the model Acquiring Input Data • Using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 ...What is Decision Modeling? A scientific approach to managerial decision making • The development of a (mathematical) model of a real-world... 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... 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