This document provides an introduction to managerial decision modeling. It defines decision modeling as a scientific approach to managerial decision making that involves developing a mathematical model of a real-world scenario to provide insight into solving a managerial problem. It discusses types of decision models, sources of data, and the typical steps involved in decision modeling, including formulation, solution, and interpretation. It also presents examples of tax computation and break-even analysis models. Finally, it outlines some possible problems that can arise in developing decision models.

1. Chapter 1:
Introduction to Managerial
Decision Modeling
© 2007 Pearson Education

2. What is Decision Modeling?
A scientific approach to managerial
decision making
• The development of a (mathematical) model
of a real-world scenario
• The model provides insight into the solution of
the managerial problem

3. Types of Decision Models
• Deterministic Models
Where all the input data value are known with
complete certainty
• Probabilistic Models
Where some input data values are uncertain

4. Quantitative vs. Qualitative Data
The modeling process begins with data
• Quantitative Data
Numerical factors such as costs and revenues
• Qualitative Data
Factors that effect the environment which are
difficult to quantify

5. Spreadsheets in Decision Making
• Computers are used to create and solve
models
• Spreadsheets are a convenient alternative
to specialized software
• Microsoft Excel has extensive modeling
capability via the use “add-ins”

6. Steps in Decision Modeling
1. Formulation
Translating a problem scenario from
words to a mathematical model
2. Solution
Solving the model to obtain the optimal
solution
3. Interpretation and Sensitivity Analysis
Analyzing results and implementing a
solution

7. Steps in
Modeling

8. Example Model: Tax Computation
Self employed couple must estimate and
pay quarterly income tax (joint return)
• Income amount is uncertain
• 5% of income to retirement account, up to
$4000 max
• Personal exemption = 2 x $3200 = $6400
• Standard deduction = $10,000
• No other deductions

9. Tax Brackets
Taxable Income
up to $14,600
$14,601 to $59,400
$59,401 to $119,950
Percent of
Taxable Income
10%
15%
25%

10. Example Model: Break-Even Analysis
Profit = Revenue – Costs
Revenue = (Selling price) x (Num. units)
Costs = (Fixed cost) +
(Cost per unit) x (Num. units)

11. The Break Even Point (BEP) is the
number of units where;
Profit = 0, so
Revenue = Costs
BEP
=
Fixed cost
(Selling price) – (Cost per unit)

12. Possible Problems in
Developing Decision Models
 Defining the Problem
• Conflicting viewpoints
• Impact on other departments
• Beginning assumptions
• Solution outdated

13. Possible Problems in
Developing Decision Models
 Developing a Model
• Fitting the textbook models
• Understanding the model
 Acquiring Input Data
• Using accounting data
• Validity of data

14. Possible Problems in
Developing Decision Models
 Developing a Solution
• Hard to understand mathematics
• Limitations of only one answer
 Testing the Solution
 Analyzing the Results
 Implementation