Table of Contents
Chapter 1 (Introduction)
Special Products Break-Even Analysis (Section 1.2)
Power Notebooks Make or Buy Example
1.2 – 1.7
1.8
This slide provides an example of a make or buy decision, where modeling can be illustrated. This
would lead into a discussion about developing a model, culminating in either a spreadsheet model,
an algebraic model, and/or a graph of the costs of the two alternatives.
1.9 – 1.22
Advertising Problem (UW Lecture)
An illustration of the management science approach to a problem. At the University of Washington,
this is the very first lecture in the core MBA class on management science. While it includes some
advanced topics (Solver, nonlinear objectives, etc.) it can be taught entirely on the spreadsheet in a
very intuitive way, and has proven to be a good introduction to the power of Solver. The next
several lectures then would need to “back up” and cover more of the fundamentals of linear
programming, modeling, the Solver, etc.
McGraw-Hill/Irwin
1.1
© The McGraw-Hill Companies, Inc., 2003
Special Products Break-Even Analysis
•
The Special Products Company produces expensive and unusual gifts.
•
The latest new-product proposal is a limited edition grandfather clock.
•
Data:
–
–
–
–
If they go ahead with this product, a fixed cost of $50,000 is incurred.
The variable cost is $400 per clock produced.
Each clock sold would generate $900 in revenue.
A sales forecast will be obtained.
Question: Should they produce the clocks, and if so, how many?
McGraw-Hill/Irwin
1.2
© The McGraw-Hill Companies, Inc., 2003
Expressing the Problem Mathematically
•
Decision variable:
– Q = Number of grandfather clocks to produce
•
Costs:
– Fixed Cost = $50,000 (if Q > 0)
– Variable Cost = $400 Q
– Total Cost =
• 0, if Q = 0
• $50,000 + $400 Q, if Q > 0
•
Profit:
– Profit = Total revenue – Total cost
• Profit = 0, if Q = 0
• Profit = $900Q – ($50,000 + $400Q) = –$50,000 + $500Q, if Q > 0
McGraw-Hill/Irwin
1.3
© The McGraw-Hill Companies, Inc., 2003
Analysis of the Problem
$
$200,000
$160,000
Revenue = $900 x
Profit
$120,000
Cost = $50,000 + $400 x
Fixed cost
$80,000
Loss
$40,000
0
40
80
120
160
200
x
Break-even point = 100 units
McGraw-Hill/Irwin
1.4
© The McGraw-Hill Companies, Inc., 2003
Management Science Interactive Modules
•
Sensitivity analysis can be performed using the Break-Even module in the Interactive
Management Science Modules (available on your MS Courseware CD packaged with
the text).
–
Here we see the impact of changing the fixed cost to $75,000.
McGraw-Hill/Irwin
1.5
© The McGraw-Hill Companies, Inc., 2003
Special Products Co. Spreadsheet
B
C
3
4
D
E
F
Data
Unit Revenue
5
Fixed Cost
Results
$900
$50,000
6
Marginal Cost
$400
7
Sales Forecast
300
Total Revenue
$270,000
Total Fixed Cost
$50,000
Total Variable Cost
$120,000
Profit (Loss)
$100,000
8
9
Production Quantity
E
3
4
5
6
7
300
F
Results
Total Revenue
Total Fixed Cost
Total Variable Cost
Profit (Loss)
McGraw-Hill/Irwin
=UnitRevenue*MIN(SalesForecast,ProductionQuantity)
=IF(ProductionQuantity>0,FixedCost,0)
Range Name
Cell
FixedCost
C5
MarginalCost
C6
ProductionQuantity
C9
Profit
F7
SalesForecast
C7
TotalFixedCost
F5
TotalRevenue
F4
TotalVariableCost
F6
UnitRevenue
C4
=MarginalCost*ProductionQuantity
=TotalRevenue-(TotalFixedCost+TotalVariableCost)
1.6
© The McGraw-Hill Companies, Inc., 2003
Special Products Co. Spreadsheet
B
C
3
4
D
E
F
Data
Unit Revenue
5
Fixed Cost
Results
$900
$50,000
6
Marginal Cost
$400
7
Sales Forecast
300
Total Revenue
$270,000
Total Fixed Cost
$50,000
Total Variable Cost
$120,000
Profit (Loss)
$100,000
8
9
Production Quantity
E
3
Total Revenue
5
Total Fixed Cost
7
Cell
BreakEvenPoint
F9
FixedCost
C5
MarginalCost
C6
ProductionQuantity
C9
Profit
F7
SalesForecast
C7
=UnitRevenue*MIN(SalesForecast,ProductionQuantity)
TotalFixedCost
F5
=IF(ProductionQuantity>0,FixedCost,0)
TotalRevenue
F4
=MarginalCost*ProductionQuantity
TotalVariableCost
F6
UnitRevenue
C4
Break-Even Point
100
F
Results
4
6
Range Name
300
Total Variable Cost
Profit (Loss)
=TotalRevenue-(TotalFixedCost+TotalVariableCost)
8
9
Break-Even Point
McGraw-Hill/Irwin
=FixedCost/(UnitRevenue-MarginalCost)
1.7
© The McGraw-Hill Companies, Inc., 2003