LESSON 1: = 25 units

INTRODUCTION TO MANAGEMENT SCIENCE

X = Php20y - 5y
Management Science – the application of a scientific
approach to solving management problems to help = Php20(25) – 5(25)
managers make better decision. = Php375
Management Science Approach to Problem Solving Conclusion: if the manager decides to produce
25 units of the product and all 25 units sell, the
1. Observation – the identification of a problem
business firm will receive Php375 in profit.
that exists in the system.
2. Problem – once it has determined that a 5. Implementation – the actual use of a model
problem exists, it must be clearly and concisely once it has been developed.
defined.
3. Model Construction – abstract representation MODEL BUILDING
of an existing problem situation. Breakeven Analysis
a. Variable – a symbol used to represent Breakeven Analysis is a modeling technique to
an item that can take on any value. determine the number of units to sell or produce that will
b. Parameters – known, constant values result in zero profit. Components are as follow:
that are often coefficients of variables in
equations 1. Sales/Revenue
c. Data – pieces of information from the i. Selling Price
problem environment ii. Units or Volume
d. Equation - a functional relationship that 2. Fixed Costs
includes variables and parameters 3. Variable Costs
4. Profit
A business firm that sells a product. The
product costs Php5 to produce and sells for  Total Cost = Fixed Cost + Variable Cost
Php20. A model that computes the total profit
that will accrue from the items sold is Total variable cost = vcv

X = Php20y - 5y Where cv = variable cost per unit

v = volume (number of units) sold
Variables: X and y
Parameters: 20 and 5 As an example, a chocolate factory incurs the
Equation: X = Php20y - 5y following monthly expenses to produce chocolates:
Assuming that the product is made from Fixed costs = cf = Php30,000
steel and that the business firm has 100 pounds Variable cost = cv = Php6 per piece
of steel available. If it takes 4 pounds of steel to
make each unit of the product, we can develop Assuming the factory produces 20,000 pieces of
an additional mathematical relationship to chocolates per month, the total cost is:
represent steel usage:
TC = cf + vcv = P30,000 + P6(20,000) = P150,000
4y = 100 lbs. of steel
 Profit = Total Revenue – Total Cost
Notations:
Assuming the chocolate sells for Php7 per piece,
Maximize X = Php20y - 5y
the total revenue is
subject to
4y = 100 lbs. of steel Total revenue = vp = Php7(20,000) = Php140,000
4. Model Solution – once models have been Hence, our total profit will be computed using our
constructed, they are solved using management developed model below:
science techniques.
Z = vp – (cf + vcv)
4y = 100 lbs. of steel = vp – cf – vcv
y = 100/4 = Php140,000 - Php30,000 - Php120,000
 = Php10,000 loss a. Increase in total cost
TC = cf + vcv
= P30,000 + P6.50(20,000)
= P160,000
 Breakeven Volume = Fixed Cost / CM b. Decrease in net profit
At the break-even point, where total revenue Z = vp – (cf + vcv)
equals total cost, the profit, Z, equals zero. Thus, if
we let profit, Z, equal zero in our total profit = vp – cf – vcv
equation and solve for v, we can determine the
= Php140,000 - Php30,000 - Php130,000
break-even volume: = Php20,000 loss
Z = vp – (cf + vcv)
c. Increase in break-even volume
0 = v(7) - Php30,000 – v(6)
v = 30,000 pieces of chocolate Z = vp – (cf + vcv)
0 = v(7) - Php30,000 – v(6.50)
*BV = Php30,000 / (Php7 – Php6) 0.50v = Php30,000
Graphical solution: v = 60,000 pieces of chocolate

Total Fixed Cost: Php30,000 Management Science Modeling Techniques

Variable Cost per unit: Php6
Breakeven Point: 30,000
1. Linear Mathematical Programming - this
involves a predetermined set of mathematical
steps used to solve a problem.
2. Probabilistic Techniques - these techniques are
distinguished from mathematical programming
techniques in that the results are probabilistic.
Sensitivity Analysis 3. Network Techniques - these models offer a
pictorial representation of the system under
The “what if” technique that examines the analysis.
changes on an answer. 4. Other Techniques - this includes nonlinear
If we increase the selling price from Php7 to Php10, this programming, simulation, forecasting and
will result to: inventory management.

a. Increase in total revenue

TR = vp = Php10(20,000) = Php200,000
b. Increase in net profit
Z = vp – (cf + vcv)
= vp – cf – vcv
= Php200,000 - Php30,000 - Php120,000
= Php50,000 income
c. Decrease in break-even volume
Z = vp – (cf + vcv)
0 = v(10) - Php30,000 – v(6)
4v= Php30,000
v = 7,500 pieces of chocolate
If we retain the selling price and increase the variable
cost per unit from Php6 to Php6.50, it will result to: