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Chapter 1: Introduction to Managerial Decision Modeling

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 chen@jepson.gonzaga.edu. What is Decision Modeling?. A scientific approach to managerial decision making

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Chapter 1: Introduction to Managerial Decision Modeling

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  1. 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 chen@jepson.gonzaga.edu

  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. 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. 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. 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. 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

  7. Steps in Modeling

  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. Tax Brackets Percent of Taxable IncomeTaxable Income up to $14,60010%$14,601 to $59,400 15%$59,401 to $119,950 25% Go to file 1-1.xls

  10. file 1-1.xls

  11. Example Model: Break-Even Analysis Profit = Revenue – Costs Revenue = (Selling price) x (Num. units) Costs = (Fixed cost) + (Cost per unit) x (Num. units)

  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

  13. Go to file 1-2.xls

  14. Possible Problems inDeveloping Decision Models • Defining the Problem • Conflicting viewpoints • Impact on other departments • Beginning assumptions • Solution outdated

  15. Possible Problems inDeveloping Decision Models • Developing a Model • Fitting the textbook models • Understanding the model • Acquiring Input Data • Using accounting data • Validity of data

  16. Possible Problems inDeveloping Decision Models • Developing a Solution • Hard to understand mathematics • Limitations of only one answer • Testing the Solution • Analyzing the Results • Implementation

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