Lesson 1

INTRODUCTION TO
QUANTITATIVE ANALYSIS
Learning Objectives
After completing this lesson, students will be able to:
1. Describe the quantitative analysis approach
2. Understand the application of quantitative analysis in a
real situation
3. Describe the use of modeling in quantitative analysis
4. Use computers and spreadsheet models to perform
quantitative analysis
5. Discuss possible problems in using quantitative analysis
6. Perform a break-even analysis

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Lesson Outline
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 The Quantitative Analysis Approach
1.4 How to Develop a Quantitative Analysis Model
1.6 Possible Problems in the Quantitative Analysis
Approach

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Introduction
■ Mathematical tools have been used for
thousands of years.
■ Quantitative analysis can be applied to a wide
variety of problems.
– It’s not enough to just know the mathematics of a
technique.
– One must understand the specific applicability of the
technique, its limitations, and its assumptions.

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Examples of Quantitative Analyses
■ In the mid 1990s, Taco Bell saved over $150 million
using forecasting and scheduling quantitative analysis
models.

■ NBC television increased revenues by over $200 million

between 1996 and 2000 by using quantitative analysis
to develop better sales plans.

■ Continental Airlines saved over $40 million in 2001

using quantitative analysis models to quickly recover
from weather delays and other disruptions.

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What is Quantitative Analysis?
Quantitative analysis is a scientific approach to
managerial decision making in which raw data are
processed and manipulated to produce meaningful
information.

Quantitative Meaningful
Raw Data Analysis Information

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What is Quantitative Analysis?
■ Quantitative factors are data that can be
accurately calculated. Examples include:
– Different investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost

■ Qualitative factors are more difficult to quantify

but affect the decision process. Examples
include:
– The weather
– State and federal legislation
– Technological breakthroughs.

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The Quantitative Analysis Approach

Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

Figure 1.1
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Defining the Problem
Develop a clear and concise statement that gives
direction and meaning to subsequent steps.
– This may be the most important and difficult step.
– It is essential to go beyond symptoms and identify
true causes.
– It may be necessary to concentrate on only a few of
the problems – selecting the right problems is very
important
– Specific and measurable objectives may have to be
developed.

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Developing a Model
Quantitative analysis models are realistic, solvable,
and understandable mathematical representations
of a situation.

$ Sales

$ Advertising

There are different types of models:

Scale Schematic
models models

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Developing a Model
Models generally contain variables (controllable
and uncontrollable) and parameters.
– Controllable variables are the decision variables
and are generally unknown.
■ How many items should be ordered for inventory?
– Parameters are known quantities that are a part of
the model.
■ What is the holding cost of the inventory?

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Acquiring Input Data
Input data must be accurate – GIGO rule:

Garbage
In
Process
Garbage
Out

Data may come from a variety of sources such as

company reports, company documents, interviews, on-
site direct measurement, or statistical sampling.

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Developing a Solution
The best (optimal) solution to a problem is found
by manipulating the model variables until a
solution is found that is practical and can be
implemented.

Common techniques are

– Solving equations.
– Trial and error – trying various approaches and
picking the best result.
– Complete enumeration – trying all possible
values.
– Using an algorithm – a series of repeating steps
to reach a solution.

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Testing the Solution
Both input data and the model should be tested
for accuracy before analysis and implementation.
– New data can be collected to test the model.
– Results should be logical, consistent, and represent
the real situation.

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Analyzing the Results
Determine the implications of the solution:
– Implementing results often requires change in an
organization.
– The impact of actions or changes needs to be
studied and understood before implementation.

Sensitivity analysis determines how much the

results will change if the model or input data
changes.
 Sensitive models should be very thoroughly tested.

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Implementing the Results
Implementation incorporates the solution into the
company.
– Implementation can be very difficult.
– People may be resistant to changes.
– Many quantitative analysis efforts have failed because
a good, workable solution was not properly
implemented.

Changes occur over time, so even successful

implementations must be monitored to determine if
modifications are necessary.

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Modeling in the Real World
Quantitative analysis models are used extensively
by real organizations to solve real problems.
– In the real world, quantitative analysis models can
be complex, expensive, and difficult to sell.
– Following the steps in the process is an important
component of success.

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How To Develop a Quantitative Analysis Model

A mathematical model of profit:

Profit = Revenue – Expenses

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How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and
variable costs. Variable costs are the product of unit costs
times the number of units.
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units sold)
– [Fixed cost + (Variable costs per
unit)(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

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How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable costs are the product of unit
costs times the number of units
Profit = Revenue – (Fixed cost + Variable cost)
The parameters of this model
Profit = (Selling
are f, v,price
and per
s asunit)(number of units sold)
these are the
–inputs
[Fixedinherent
cost + (Variable costs per
in the model
unit)(Number of units sold)]
The decision variable of interest
is –X [f + vX]
Profit = sX
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

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Pritchett’s Precious Time Pieces
The company buys, sells, and repairs old clocks. Rebuilt
springs sell for $10 per unit. Fixed cost of equipment to
build springs is $1,000. Variable cost for spring material is
$5 per unit.
s = 10 f = 1,000 v=5
Number of spring sets sold = X
Profits = sX – f – vX

If sales = 0, profits = -f = –$1,000.

If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000

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Pritchett’s Precious Time Pieces
Companies are often interested in the break-even point
(BEP). The BEP is the number of units sold that will
result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f
Solving for X, we have
f = (s – v)X
f
X= s–v

Fixed cost
BEP = (Selling price per unit) – (Variable cost per unit)

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Pritchett’s Precious Time Pieces

Companies are often interested in their break-even

point (BEP). The BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit.

0BEP f – vX, or –0$5)

= sX =– $1,000/($10 = (s=–200
v)X units
–f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
will result in a loss.
f = (s – v)X
Sales of over 200 unitsfof rebuilt springs will
result in a profit. X =
s–v

Fixed cost
BEP = (Selling price per unit) – (Variable cost per unit)

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Advantages of Mathematical Modeling
1. Models can accurately represent reality.
2. Models can help a decision maker formulate problems.
3. Models can give us insight and information.
4. Models can save time and money in decision making and problem
solving.
5. A model may be the only way to solve large or complex problems in a
timely fashion.
6. A model can be used to communicate problems and solutions to
others.

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Models Categorized by Risk
■ Mathematical models that do not involve risk are called deterministic
models.
– All of the values used in the model are known with complete
certainty.
■ Mathematical models that involve risk, chance, or uncertainty are
called probabilistic models.
– Values used in the model are estimates based on probabilities.

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Possible Problems in the Quantitative Analysis
Approach
Defining the problem
– Problems may not be easily identified.
– There may be conflicting viewpoints
– There may be an impact on other departments.
– Beginning assumptions may lead to a particular
conclusion.
– The solution may be outdated.
Developing a model
– Manager’s perception may not fit a textbook
model.
– There is a trade-off between complexity and ease
of understanding.
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Possible Problems in the Quantitative Analysis
Approach
Acquiring accurate input data
– Accounting data may not be collected for quantitative problems.
– The validity of the data may be suspect.
Developing an appropriate solution
– The mathematics may be hard to understand.
– Having only one answer may be limiting.
Testing the solution for validity
Analyzing the results in terms of the whole organization

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Implementation
There may be an institutional lack of commitment and resistance to
change.
– Management may fear the use of formal analysis processes will
reduce their decision-making power.
– Action-oriented managers may want “quick and dirty” techniques.
– Management support and user involvement are important.

There may be a lack of commitment by quantitative analysts.

– Analysts should be involved with the problem and care
about the solution.
– Analysts should work with users and take their feelings
into account.

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 SAMPLE
PROBLEMS

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Problem 1:
Gina Fox has started her own company, Foxy Shirts,
which manufactures imprinted shirts for special
occasions. Since she has just begun this operation,
she rents the equipment from a local printing shop
when necessary. The cost of using the equipment is
$350. The materials used in one shirt cost $8, and
Gina can sell these for $15 each.

a)If Gina sells 20 shirts, what will her total revenue

be? What will her total variable cost be?
b)How many shirts must Gina sell to break even?
What is the total revenue for this?
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ASSIGNMENT

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Problem 1:
Ray Bond sells handcrafted yard decorations at
county fairs. The variable cost to make these is $20
each, and he sells them for $50. The cost to rent a
booth at the fair is $150. How many of these must
Ray sell to break even?

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Problem 2:
Ray Bond, from Problem (1), is trying to find a new
supplier that will reduce his variable cost of
production to $15 per unit. If he was able to
succeed in reducing this cost, what would the
break-even point be?

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Problem 3:
Katherine D’ Ann is planning to finance her college
education by selling programs at the football games
for State University. There is a fixed cost of $400
for printing these programs, and the variable cost is
$3. There is also a $1,000 fee that is paid to the
university for the right to sell these programs. If
Katherine was able to sell programs for $5 each,
how many would she have to sell in order to break
even?

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Problem 4:
Katherine D’ Ann, from Problem 3, has become
concerned that sales may fall, as the team is on a
terrible losing streak, and attendance has fallen
off. In fact, Katherine believes that she will sell only
500 programs for the next game. If it was possible
to raise the selling price of the program and still
sell 500, what would the price have to be for
Katherine to break even by selling 500?

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Assignment Instructions:
■ Copy and Answer the problems.
■ Write your complete solution in short bond paper.

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