Management Science: Understanding the Scientific Approach to Business Problems, Schemes and Mind Maps of Accounting

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• Chapter

OBJECTIVES

Know what is Management Science and its

applications

Relate Management Science to Accounting

Understand the Basics of scientific method

approach

Apply the scientific method approach to

business situations

Model Building: Break-even Analysis

Management Science VS Accounting

A discipline that attempts to aid managerial decision making by applying a scientific approach to managerial problems

Management Science VS Accounting

Provides financial information That are useful in decision making

Information and Data: Business firm makes and sells a steel product Product costs $5 to produce Product sells for $ Product requires 4 pounds of steel to make Firm has 100 pounds of steel Business Problem: Determine the number of units to produce to make the most profit given the limited amount of steel available.

Problem Definition

Example of Model Construction (1 of 2)

Variables: X = number of units (decision variable) Z = total profit Model: Z = $20 X - $5 X (objective function) 4 X = 100 lb of steel (resource constraint) Parameters: $20, $5, 4 lbs, 100 lbs (known values) Formal Specification of Model: maximize Z = $20 X - $5 X subject to 4 X = 100

Problem Definition

Example of Model Construction (2 of 2)

Example

Monthly sales average 40 units (480 ÷ 12)

Model Building

Break-Even Analysis (1 of 7)

Used to determine the number of units of a product to sell or produce (i.e. volume) that will equate total revenue with total cost. The volume at which total revenue equals total cost is called the break-even point. Profit at break-even point is zero.

Model Building

Break-Even Analysis (3 of 7)

Computing the Break-Even Point The break-even point is that volume at which total revenue equals total cost and profit is zero: V = c f /(p – c v

Example: Western Clothing Company c f

c v = $8 per pair p = $23 per pair V = 666.7 pairs, break-even point

Model Building

Break-Even Analysis (4 of 7)

Graphical Solution Figure 1. Break-Even Model

Figure 1. Sensitivity Analysis - Break-Even Model with a Change in Variable Cost

Model Building

Break-Even Analysis (6 of 7)

Figure 1. Sensitivity Analysis - Break-Even Model with a Change in Fixed Cost

Model Building

Break-Even Analysis (7 of 7)