MANAG E M E N T

S C I E N C E
CHAPTER 1
 WHAT IS MANAGEMENT
SCIENCE?
A SCIENTIFIC APPROACH TO SOLVING
MANAGEMENT PROBLEMS.
MANAGEMENT SCIENCE (ALSO REFERRED TO AS
OPERATIONS RESEARCH, QUANTITATIVE
METHODS, QUANTITATIVE ANALYSIS, AND
DECISION SCIENCES) IS PART OF THE
FUNDAMENTAL CURRICULUM OF MOST
PROGRAMS IN BUSINESS.
 THE MANAGEMENT SCIENCE APPROACH
TO PROBLEM SOLVING
1.OBSERVATION
THE FIVE STEPS OF THE SCIENTIFIC
 THE FIRST STEP IN THE MANAGEMENT SCIENCE PROCESS IS THE
METHOD IDENTIFICATION OF A PROBLEM THAT EXISTS IN THE SYSTEM
1.OBSERVATION (ORGANIZATION).


2.PROBLEM DEFINITION THE PERSON WHO NORMALLY IDENTIFIES A PROBLEM IS THE
MANAGER BECAUSE MANAGERS WORK IN PLACES WHERE PROBLEMS
3.MODEL CONSTRUCTION MIGHT OCCUR.

4.MODEL SOLUTION, AND  HOWEVER, PROBLEMS CAN OFTEN BE IDENTIFIED BY A

MANAGEMENT SCIENTIST, A PERSON SKILLED IN THE TECHNIQUES OF
5.IMPLEMENTATION MANAGEMENT SCIENCE AND TRAINED TO IDENTIFY PROBLEMS.
 THE MANAGEMENT SCIENCE APPROACH TO
PROBLEM SOLVING
2.PROBLEM DEFINITION THESE MATHEMATICAL RELATIONSHIPS
THE PROBLEM MUST BE CLEARLY AND CONCISELY DEFINED. ARE MADE UP OF NUMBERS AND
SYMBOLS.
A STATED OBJECTIVE HELPS TO FOCUS ATTENTION ON WHAT THE
PROBLEM ACTUALLY IS.

4.MODEL SOLUTION
3.MODEL CONSTRUCTION WE ARE ABLE TO SAY THAT A MODEL IS
A MANAGEMENT SCIENCE MODEL IS AN ABSTRACT SOLVED BECAUSE THE MODEL
REPRESENTATION OF AN EXISTING PROBLEM SITUATION. REPRESENTS A PROBLEM.

IT CONSISTS OF A SET OF MATHEMATICAL RELATIONSHIPS. WHEN WE REFER TO MODEL SOLUTION,

WE ALSO MEAN PROBLEM SOLUTION.
 THE MANAGEMENT SCIENCE APPROACH TO
PROBLEM SOLVING
5. IMPLEMENTATION SOME TERMINOLOGIES FOR THIS STUDY:
THE FINAL STEP IN THE MANAGEMENT SCIENCE PROCESS VARIABLE – IS A SYMBOL USED TO REPRESENT AN ITEM THAT CAN BE ON ANY
FOR PROBLEM SOLVING.
VALUE.
IT IS THE ACTUAL USE OF THE MODEL ONCE IT HAS BEEN PARAMETERS – ARE KNOWN CONSTANT VALUES THAT ARE OFTEN COEFFICIENTS
DEVELOPED OR THE SOLUTION TO THE PROBLEM THE
OF VARIABLES IN EQUATIONS.
MODEL WAS DEVELOPED TO SOLVE.
DATA – ARE PIECES OF INFORMATION FROM THE PROBLEM ENVIRONMENT.
IT IS NOT ALWAYS A GIVEN THAT ONCE A MODEL IS
DEVELOPED OR A SOLUTION FOUND, IT IS AUTOMATICALLY FUNCTIONAL RELATIONSHIP – A MODEL IS A FUNCTIONAL RELATIONSHIP THAT
USED. INCLUDES VARIABLES, PARAMETERS, AND EQUATIONS.

IF MODEL AND SOLUTION ARE NOT IMPLEMENTED, THEN EXAMPLE: A BUSINESS FIRM SELLS A PRODUCT. THE PRODUCT COSTS $5 TO
THE EFFORT AND RESOURCES USED IN THEIR PRODUCE AND SELLS FOR $20. A MODEL THAT COMPUTES THE TOTAL
DEVELOPMENT HAVE BEEN WASTED. PROFIT THAT WILL ACCRUE FROM THE ITEMS SOLD IS
 MODEL BUILDING: BREAK-EVEN ANALYSIS
THE THREE (3) COMPONENTS OF BREAK-EVEN ANALYSIS:
BREAK-EVEN ANALYSIS – IS A 1.VOLUME – IS THE LEVEL OF SALES OR PRODUCTION BY A
COMPANY.
MODELING TECHNIQUE TO
2.COSTS. THERE ARE TWO TYPES OF COSTS: FIXED COST
DETERMINE THE NUMBER OF AND VARIABLE COSTS.

UNITS TO SELL OR PRODUCE a. FIXED COSTS – ARE GENERALLY INDEPENDENT OF

THE VOLUME OF UNITS PRODUCED AND SOLD.
THAT WILL RESULT IN ZERO b. VARIABLE COSTS – ARE DETERMINED ON A PER
PROFIT. UNIT BASIS.
3.PROFIT – IS THE DIFFERENCE BETWEEN TOTAL REVENUE
(VOLUME MULTIPLIED BY PRICE) AND TOTAL COST.
 MODEL BUILDING: BREAK-EVEN ANALYSIS
TOTAL VARIABLE COST =
TOTAL VARIABLE COSTS
WHERE:
ARE A FUNCTION OF
VOLUME (NUMBER OF UNITS) SOLD.
THE VOLUME AND = VARIABLE COST PER UNIT
THE VARIABLE COST
PER UNIT.
 MODEL BUILDING: BREAK-EVEN ANALYSIS

TOTAL COST = TOTAL FIXED COST + TOTAL

TOTAL COSTS (TC) VARIABLE COST

EQUALS THE FIXED

COST PLUS THE
WHERE:
VARIABLE COST PER TC = TOTAL COST

UNIT MULTIPLIED BY = FIXED COST

VOLUME .
 MODEL BUILDING: BREAK-EVEN ANALYSIS
PROFIT = TOTAL REVENUE – TOTAL COST

PROFIT IS THE
DIFFERENCE BETWEEN
TOTAL REVENUE WHERE:

(VOLUME MULTIPLIED Z = PROFIT

= PRICE PER UNIT
BY PRICE) AND TOTAL
COST
 MODEL BUILDING: BREAK-EVEN ANALYSIS
EXAMPLE:
COMPUTING THE PROFIT:
WESTERN CLOTHING COMPANY
PROFIT = TOTAL REVENUE – TOTAL COST
PRODUCES DENIM JEANS. THE COMPANY
INCURS THE FOLLOWING MONTHLY
COSTS TO PRODUCE THE DENIM JEANS:
FIXED COST = $10,000
VARIABLE UNIT COST = $8 PER PAIR
IF DENIM JEANS SELL FOR $23 PER PAIR
AND SOLD 400 PAIRS PER MONTH, WHAT
IS THE PROFIT?
 MODEL BUILDING: BREAK-EVEN ANALYSIS
COMPUTING THE BREAK-EVEN POINT:
EXAMPLE: BREAK-EVEN VOLUME CAN BE
DETERMINED USING THE FOLLOWING FORMULA:
WESTERN CLOTHING COMPANY
PRODUCES DENIM JEANS. THE COMPANY
INCURS THE FOLLOWING MONTHLY
COSTS TO PRODUCE THE DENIM JEANS:
FIXED COST = $10,000
VARIABLE UNIT COST = $8 PER PAIR
IF DENIM JEANS SELL FOR $23 PER PAIR, (BREAK-EVEN FORMULA)
FIXED COSTS AND VARIABLE UNIT COST
ARE THE SAME, WHAT IS THE VOLUME TO
BREAK-EVEN? PAIR OF JEANS
BREAK-EVEN CHART
BREAK-EVEN CHART
BREAK-EVEN CHART
 PROBLEM EXERCISES
1.THE WILLOW FURNITURE COMPANY PRODUCES TABLES. THE FIXED MONTHLY COST OF PRODUCTION IS
$8,000, AND THE VARIABLE COST PER TABLE IS $65. THE TABLES SELL FOR $180 A 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 WILLOW FURNITURE COMPANY.
2.THE RETREAD TIRE COMPANY RECAPS TIRES. THE FIXED ANNUAL COST OF THE RECAPPING OPERATION
IS $60,000. THE VARIABLE COST OF RECAPPING A TIRE IS $9. THE COMPANY CHARGES $25 TO RECAP A
TIRE.
a. FOR AN ANNUAL VOLUME OF 12,000 TIRES, DETERMINE THE TOTAL COST, TOTAL REVENUE, AND PROFIT.
b. DETERMINE THE ANNUAL BREAK-EVEN VOLUME FOR THE RETREAD TIRE COMPANY OPERATION.
3.EVERGREEN FERTILIZER COMPANY PRODUCES FERTILIZER. THE COMPANY’S FIXED MONTHLY COST IS
$25,000, AND ITS VARIABLE COST PER POUND OF FERTILIZER IS $0.15. EVERGREEN SELLS THE FERTILIZER
FOR $0.40 PER POUND. DETERMINE THE MONTHLY BREAK-EVEN VOLUME FOR THE COMPANY.
 PROBLEM EXERCISES
4.THE ROLLING CREEK TEXTILE MILL PRODUCES DENIM. THE FIXED MONTHLY COST IS $21,000, AND VARIABLE COST
PER YARD OF DENIM IS $0.45. THE MILL SELLS A YARD OF DENIM FOR $1.30.
a. FOR A MONTHLY VOLUME OF 18,000 YARDS OF DENIM, DETERMINE THE TOTAL COST, TOTAL REVENUE, AND
PROFIT.
b. DETERMINE THE ANNUAL BREAK-EVEN VOLUME FOR THE ROLLING CREEK TEXTILE MILL.
5.THE RETREAD TIRE COMPANY RECAPS TIRES. THE FIXED ANNUAL COST OF THE RECAPPING OPERATION IS $60,000.
THE VARIABLE COST OF RECAPPING A TIRE IS $9. THE COMPANY CHARGES $25 TO RECAP A TIRE.
a. IF PRICING FOR RECAPPING A TIRE CHANGES FROM $25 TO $31, WHAT EFFECT WILL THE CHANGE HAVE ON
THE BREAK-EVEN VOLUME?.
6.EVERGREEN FERTILIZER COMPANY PRODUCES FERTILIZER. THE COMPANY’S FIXED MONTHLY COST IS $25,000, AND
ITS VARIABLE COST PER POUND OF FERTILIZER IS $0.15. EVERGREEN SELLS THE FERTILIZER FOR $0.40 PER POUND. IF
THE SELLING PRICE OF ITS FERTILIZER CHANGES FROM 0.40 TO $0.60 PER POUND, WHAT EFFECT WILL THE CHANGE
HAVE ON THE BREAK-EVEN VOLUME?.
 PROBLEM EXERCISES
7.PASTURELAND DAIRY MAKES CHEESE, WHICH IT SELLS AT LOCAL SUPERMARKETS. THE FIXED MONTHLY COST OF
PRODUCTION IS $4,000, AND THE VARIABLE COST PER POUND OF CHEESE IS $0.21. THE CHEESE SELLS FOR $0.75
PER POUND; HOWEVER, THE DAIRY IS CONSIDERING RAISING THE PRICE TO $0.95 PER POUND. THE DAIRY
CURRENTLY PRODUCES AND SELLS 9,000 POUNDS OF CHEESE PER MONTH, BUT IF IT RAISES ITS PRICE PER POUND,
SALES WILL DECREASE TO 5,700 POUNDS PER MONTH. SHOULD THE DAIRY RAISE THE PRICE?
8.ANDY MENDOZA MAKES HANDCRAFTED DOLLS, WHICH HE SELLS AT CRAFT FAIRS. HE IS CONSIDERING MASS
PRODUCING THE DOLLS TO SELL IN STORES. HE ESTIMATES THAT THE INITIAL INVESTMENT FOR PLANT AND
EQUIPMENT WILL BE $25,000, WHEREAS LABOR, MATERIAL, PACKAGING AND SHIPPING WILL BE ABOUT $10 PER
DOLL. IF THE DOLLS ARE SOLD FOR $30 EACH, WHAT SALES VOLUME IS NECESSARY FOR ANDY TO BREAK-EVEN?
9.FOR THE DOLL-MANUFACTURING ENTERPRISE DESCRIBES IN PROBLEM 8, ANDY MENDOZA HAS DETERMINED THAT
$10,000 WORTH OF ADVERTISING WILL INCREASE SALES VOLUME BY 400 DOLLS. SHOULD HE SPEND THE EXTRA
AMOUNT FOR ADVERTISING?.
 PROBLEM EXERCISES
10.ANDY MENDOZA IN PROBLEM 8 IS CONCERNED THAT THE DEMAND FOR HIS DOLLS WILL NOT EXCEED THE BREAK-EVEN POINT. HE BELIEVES HE CAN
REDUCE HIS INITIAL INVESTMENT BY PURCHASING USED SEWING MACHINES AND FEWER MACHINES. THIS WILL REDUCE HIS INITIAL INVESTMENT
FROM $25,000 TO $17,000. HOWEVER, IT WILL ALSO REQUIRE HIS EMPLOYEES TO WORK MORE SLOWLY AND PERFORM MORE OPERATIONS BY
HAND, THUS INCREASING VARIABLE COST FROM $10 TO $14 PER DOLL. WILL THESE CHANGES REDUCE HIS BREAK-EVEN POINT?

11.THE GENERAL STORE AT STATE UNIVERSITY IS AN AUXILIARY BOOKSTORE LOCATED NEAR THE DORMITORIES THAT SELLS ACADEMIC SUPPLIES,
TOILETRIES, SWEATSHIRTS AND T-SHIRTS, MAGAZINES, PACKAGED FOOD ITEMS, AND CANNED SOFT DRINKS AND FRUIT DRINKS. THE MANAGER OF
THE STORE HAS NOTICED THAT SEVERAL PIZZA DELIVERY SERVICES NEAR CAMPUS MAKE FREQUENT DELIVERIES. THE MANAGER IS THEREFORE
CONSIDERING SELLING PIZZA AT THE STORE. SHE COULD BUY PREMADE FROZEN PIZZAS AND HEAT THEM IN AN OVEN. THE COST OF THE OVEN AND
FREEZER WOULD BE $27,000. THE FROZEN PIZZAS COST $3.75 EACH TO BUY FROM A DISTRIBUTOR AND TO PREPARE (INCLUDING LABOR AND A BOX),
TO BE COMPETITIVE WITH THE LOCAL DELIVERY SERVICES, THE MANAGER BELIEVES SHE SHOULD SELL THE PIZZAS FOR $8.95 A PIECE. THE MANAGER
NEEDS TO WRITE UP A PROPOSAL FOR THE UNIVERSITY’S DIRECTOR OF AUXILIARY SERVICES.
a. DETERMINE HOW MANY PIZZAS WOULD HAVE TO BE SOLD TO BREAK-EVEN.
b. IF THE GENERAL STORE SELLS 20 PIZZAS PER DAY, HOW MANY DAYS WOULD IT TAKE TO BREAK-EVEN?
c. THE MANAGER OF THE STORE ANTICIPATES THAT ONCE THE LOCAL PIZZA DELIVERY SERVICES START LOSING BUSINESS, THEY WILL REACT BY
CUTTING PRICES. IF AFTER A MONTH (30 DAYS) THE MANAGER HAS TO LOWER THE PRICE OF A PIZZA TO $7.95 TO KEEP DEMAND AT 20
PIZZAS PER DAY, AS SHE EXPECTS, WHAT WILL THE NEW BREAK-EVEN POINT BE, AND HOW LONG WILL IT TAKE THE STORE TO BREAK-EVEN?
 PROBLEM EXERCISES
12.ANNIE RUSSELL, A STUDENT AT TECH, PLANS TO OPEN A HOT DOG STAND INSIDE TECH’S FOOTBALL STADIUM DURING HOME
GAMES. THERE ARE SEVEN HOME GAMES SCHEDULED FOR THE UPCOMING SEASON. SHE MUST PAY THE TECH ATHLETIC
DEPARTMENT A VENDOR’S FEE OF $3,000 FOR THE SEASON. HER STAND AND OTHER EQUIPMENT WILL COST HER $4,500 FOR THE
SEASON. SHE ESTIMATES THAT EACH HOT DOG SHE SELLS WILL COST HER $0.35. SHE HAS TALKED TO FRIENDS AT OTHER
UNIVERSITIES WHO SELL HOT DOGS AT GAMES. BASED ON THEIR INFORMATION AND THE ATHLETIC DEPARTMENT’S FORECAST
THAT EACH GAME WILL SELL OUT, SHE ANTICIPATES THAT SHE WILL SELL APPROXIMATELY 2,000 HOT DOGS DURING EACH GAME.
a. WHAT PRICE SHOULD SHE CHARGE FOR A HOT DOG IN ORDER TO BREAK-EVEN?
b. WHAT FACTORS MIGHT OCCUR DURING THE SEASON THAT WOULD ALTER THE VOLUME SOLD AND THUS THE BREAK-EVEN
PRICE ANNIE MIGHT CHARGE?
c. WHAT PRICE WOULD YOU SUGGEST THAT ANNIE CHARGE FOR A HOT DOG TO PROVIDE HER WITH A REASONABLE PROFIT
WHILE REMAINING COMPETITIVE WITH OTHER FOOD VENDORS?
 PROBLEM EXERCISES
13.HANNAH BYERS AND KATHLEEN TAYLOR ARE CONSIDERING THE POSSIBILITY OF TEACHING SWIMMING TO KIDS DURING THE
SUMMER. A LOCAL SWIM CLUB OPENS ITS POOL AT NOON EACH DAY, SO IT IS AVAILABLE TO RENT DURING HE MORNING. THE
COST OF RENTING THE POOL DURING THE 10-WEEK PERIOD FOR WHICH HANNAH AND KATHLEEN WOULD NEED IT IS $1,700.
THE POOL WOULD ALSO CHARGE HANNAH AND KATHLEEN AN ADMISSION, TOWER SERVICE, AND LIFE GUARDING FEE OF $7
PER PUPIL, AND HANNAH AND KATHLEEN ESTIMATE AN ADDITIONAL $5 COST PER STUDENT TO HIRE SEVERAL ASSISTANTS.
HANNAH AND KATHLEEN PLAN TO CHARGE $75 PER STUDENT FOR THE 10-WEEK SWIMMING CLASS.
a. HOW MANY PUPILS DO HANNAH AND KATHLEEN NEED TO ENROLL IN THEIR CLASS TO BREAK-EVEN?
b. IF HANNAH AND KATHLEEN WANT TO MAKE A PROFIT OF $5,000 FOR THE SUMMER, HOW MANY PUPILS DO THEY NEED
TO ENROLL?
c. HANNAH AND KATHLEEN ESTIMATE THAT THEY MIGHT NOT BE ABLE TO ENROLL MORE THAN 60 PUPILS. IF THEY
ENROLL THIS MANY PUPILS, HOW MUCH WOULD THEY NEED TO CHARGE PER PUPIL IN ORDER TO REALIZE THEIR
PROFIT GOAL OF $5,000?
 PROBLEM EXERCISES
14.KATHLEEN TAYLOR IS A HIGH SCHOOL STUDENT WHO HAS BEEN INVESTIGATING THE POSSIBILITY OF MOWING LAWNS
FRO A SUMMER JOB. SHE HAS A COUPLE OF FRIENDS SHE THINKS SHE COULD HIRE ON AN HOURLY BASIS PER JOB. THE
EQUIPMENT, INCLUDING TWO NEW LAWNMOWERS AND WEED-EATERS, WOULD COST HER $500, AND SHE ESTIMATES
HER COST PER LAWN, BASED ON THE TIME REQUIRED TO PAY HER FRIENDS TO MOW AN AVERAGE RESIDENTIAL LAWN
(AND NOT INCLUDING HER OWN LABOR) AND GAS FOR DRIVING TO THE JOBS AND MOWING, WOULD BE ABOUT $14.
a. IF SHE CHARGES CUSTOMERS $30 PER LAWN, HOW MANY LAWNS WOULD SHE NEED TO MOW TO BREAK-EVEN?
b. KATHLEEN HAS 8 WEEKS AVAILABLE TO MOW LAWNS BEFORE SCHOOL STARTS AGAIN, AND SHE ESTIMATES THAT
SHE CAN GET ENOUGH CUSTOMERS TO MOW AT LEAST THREE LAWNS PER DAY, 6 DAYS PER WEEK. HOW MUCH
MONEY CAN SHE EXPECT TO MAKE OVER THE SUMMER?
c. KATHLEEN BELIEVES SHE CAN GET MORE BUSINESS IF SHE LOWERS HER PRICE PER LAWN. IF SHE LOWERS HER PRICE
TO $25 PER LAWN AND INCREASES HER NUMBER OF JOBS TO FOUR PER DAY (WHICH IS ABOUT ALL SHE CAN
HANDLE ANYWAY), SHOULD SHE MAKE THIS DECISION?