COLLEGE OF ACCOUNTANCY

Course: AE 4 – MANAGEMENT SCIENCE

Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Lecture 1
MANAGEMENT SCIENCE
• Application of scientific approach to solving management problems in
order to help managers make better decisions.
• Encompasses numerous mathematically oriented techniques that adapted
from other disciplines.
• A recognized and established discipline in business.
• Also known as the Operations Research, Quantitative Methods,
Quantitative Analysis, and Decision Science

Management Science is a scientific approach to solving management

problems. It can be used in a variety of organizations to solve man different
types of problems. It encompasses a logical approach to problem solving.

MANAGEMENT SCIENCE PROCESS

• Observation
❖ The first step in the management science process is the identification
of problem that exist in the system. The problems are identified not
just only because of crisis, but also through observation.
❖ Management Scientist is a trained person that identifies the problem.
They are also skilled in the techniques of management science.

• Definition of Problem

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

❖ Improper definition of the problem can easily result in no solution or

an inappropriate solution.
❖ The existence of the problem implies that the objectives are not met in
some way, the goals of the organization must also be clearly defined.

• Model Construction
❖ A management science model is an abstract representation of an
existing problem situation.
❖ It can be in a form of graph or chart, but frequently it is a model
consists of set of mathematical relationships. Mathematical
Relationships are made up of numbers and symbols (variable).
❖ Variable – a symbol used to represent an item that can take on any
value.
❖ Parameters – these are constant values that are generally coefficients
of the variables in an equation.
❖ Data – pieces of information from the problem environment.
❖ Functional Relationship – a model that includes variables,
parameters, and equations.
❖ Decision variable – refers to the variable that represents a potential
or recommended decision to the manager.
❖ Example: Consider a business firm that sells a steel pipe. The product
costs Php 500 to produce and sells for Php 2 000. The firm has 100
lbs. of steel available, and each steel pipe needs 4 lbs.
Z = 2000x – 500x (first model) – objective function
4x = 100 (second model) – constraint
x is the decision variable

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

• Model Solution
❖ A technique applies to a specific model type.
❖ A model is solved because a model represents a problem.
❖ A Management Science Solution can be either a recommended decision
or information that helps a manager make a decision.
❖ Example: Consider a business firm that sells a steel pipe. The product
costs Php 50 to produce and sells for Php 200. The firm has 100 lbs.
of steel available, and each steel pipe needs 4 lbs.
Z = 2 000x – 500x (first model) – objective function
4x = 100 (second model) – constraint
x is the decision variable
Solving the constraint equation for x, we have
4x = 100
x = 25
Let’s find the maximized profit based on the decision value obtained
in the constraint equation.
Z = 2 000x – 500x
Z = 2 000(25) – 500(25)
Z = Php 37 500

• Implementation
❖ The final step in the management science process for problem solving.
❖ It is the actual use of the model once it has been developed or a solution
is found.

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Observation

Problem Definition

Management
Model Construction Science Technique
Feedback

Solution
Information

Implementation

Figure 1. The Management Science Process

MODEL BUILDING: BREAK – EVEN ANALYSIS

• Also called as Profit Analysis
• Provides
• Provides a convenient means to demonstrate the different ways
management science models can be solved mathematically, graphically
and with computer.
• Components of Break – Even Analysis
❖ The three components are volume, cost and profit.
❖ Volume is the level of sales or production by a company. It can be
expressed as the number of units produced and sold.
❖ Cost

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

o Fixed Costs are independent of the volume of units produced and

sold. It remains constant regardless of how many units of products
are produced with a given range.
o Variable Costs are determined on a per – unit basis. It depends on
the number of items produced.
o Total Cost is the sum of total fixed cost and variable cost.
Total Cost = Total Fixed Cost + Total Variable Cost
TC = cf + vcv , where
TC is the Total Cost
cf is the fixed cost
v is the volume
cv is the variable cost
❖ Profit is the difference between the total revenue (volume multiplied
by price) and the total cost.
Z = vp – (cf + vc)
❖ Break – Even Point is the volume (v) that equates total revenue with
total cost where profit is zero.
❖ Example: A Clothing Company produces 400 denim jeans per month.
The company incurs a fixed cost of Php 100 000, and a variable cost of
Php 80 per pair. Each denim jeans costs Php 230.
Total Revenue = vp
Total Revenue = (400) (230)
Total Revenue = Php 92 000
Z = vp – (cf + vc)
Z= Php 92 000 – [Php 100 000 + 400(80)]
Z = Php 92 000 – Php 132 000

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Z = - Php 40 000
Since the computed profit is negative, let us identify the break – even
point. This means that we are going to determine the break – even
volume (which is our decision variable).
Z = vp – (cf + vcv)
0 = v(Php 230) – [Php 10 000 + v(80)]
0 = 230v – 10 000 – 80v
0 = 150v – 10 000
150v = 10 000
v = 666.7 pairs of jeans

This means that if the company produces 666.7 pairs of jeans in a

month, they will have 0 profit and the company will break even. This
gives the company an information or point of reference from which
to determine how many pairs of jeans it needs to produce and sell in
order to gain a profit.

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Figure 2. Graphical Solution on Break – Even Analysis

• Sensitivity Analysis -the study of changes on a management science

models. In this analysis, we analyze the effect of other variables. For
instance, instead of volume, we make price as our decision variable.
o Example: From the previous problem, let us increase the price to
Php 300.
Z = vp – (cf + vcv)
0 = v(Php 300) – [Php 10 000 + v(80)]
0 = 300v – 10 000 – 80v
0 = 220v – 10 000
220v = 10 000
v = 454.5 pairs of jeans

Figure 3. Break – Even Model with an Increase in Price

Increasing the price lowers the break – even point and all other things
remain constant. Although the decision to increase price looks

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

inviting, it must be remembered that the lower the break-even

volume and higher profit are possible but not guaranteed. A higher
price can make it more difficult to sell the product. The change in
price must be accompanied by corresponding increase in variable
costs.

When we increased the price, it is possible to raise the quality of the

product to offset the potential loss of sales due to price increase. For
instance the stitching on the denim jeans is changed to make the
jeans more attractive and stronger. This change results in the
increase in variable costs of Php 40 per pair. This change the results
in a break – even volume.
Z = vp – (cf + vcv)
0 = v(Php 300) – [Php 10 000 + v(120)]
0 = 300v – 10 000 – 120v
0 = 180v – 10 000
180v = 10 000
v = 555.5 pairs of jeans
An increase in variable costs will decrease the break – even point, and
all other things held constant.

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Figure 4. Break – Even Model with an Increase Variable Cost

MANAGEMENT SCIENCE MODELING TECHNIQUE

1. Linear Mathematical Programming Techniques
2. Probabilistic Techniques
3. Network Techniques
4. Analytical Hierarchy Process
5. Nonlinear Programming Techniques
6. Simulation
7. Forecasting
8. Inventory management

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism
COLLEGE OF ACCOUNTANCY
Course: AE 4 – MANAGEMENT SCIENCE
Student’s Name: ______________________
Instructor: NEIL JOHN R. ZARZUA, LPT

Assignment
1. A furniture company produces table. The fixed monthly cost of production
is Php 80 000, and the variable cost per table is Php 650. The table sell for
Php 180 per piece.
a. For a monthly volume of 300 tables, determine the total cost, total
revenue and profit.
b. Determine the monthly break-even volume for the company.

2. The Graduate School and Research Department is planning to begin an

online MBA Program. The initial start – up cost for computing equipment,
facilities, course development, and staff recruitment and development is
Php 350 000. The GSAR plans to charge tuition of Php 18 000 per student
per year. However, the university administration will charge only the
college Php 12 000 per student for the first 100 students enrolled each
year for administrative costs and its share of the tuition payments.
A. How many students does the college need to enroll in the first year to
break even?
B. If the college can enrol 75 students the first year, how much profit will
it make?
C. The college believes it can increase tuition to Php 24 000, but doing so
would reduce to 35. Should the college consider doing this? Explain.

PAMANTASAN NG LUNGSOD NG SAN PABLO

Brgy. San Jose, San Pablo City

Tel No.: (049) 536-7830
Email Address: [email protected]
Patriotism • Leadership • Service • Professionalism