CHAPTER 1

Introduction to Managerial
Decision Modeling

PowerPoint presentation to accompany

Balakrishnan/Render/Stair
Managerial Decision Modeling with Spreadsheets, 3/e
2013 Pearson Education, Inc. publishing as Prentice Hall 1-1
 LEARNING OBJECTIVES

1. Define decision model and describe

the importance of such models.
2. Understand the two types of decision
models: deterministic and probabilistic
models.
3. Understand the steps involved in
developing decision models in
practical situations.

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 LEARNING OBJECTIVES

4. Understand the use of spreadsheets

in developing decision models.
5. Discuss possible problems in
developing decision models.

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 What is Decision Modeling?

Scientific approach to managerial

decision making
Often mathematical
Model real-world scenarios
Provide insights into solutions

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 Type of Models

Deterministic
All relevant data known with certainty
Mathematical models

Probabilistic
Some data uncertain
Use of probability and statistics

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 Type of Models
Quantitative
Numerical values(rates of return, financial
ratios, cash flows, etc.)
Qualitative
Factors cant be quantified(know-how,
experience, insights, etc.)
Can be important
May be combined in decision making
(Quantitative + Qualitative)

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 Type of Models
Spreadsheets in Decision Modeling
Computers an integral part of decision
modeling
Spreadsheets often replace specialized
software
Excel built-in functions and add-ins
Built-in functions: Goal Seek, Data Table,
Chart Wizard
Add-ins: Data Analysis, Solver

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 Steps in Decision Modeling
1. Formulation
Aspects translated and expressed as a
mathematical model
2. Solution
Finding the optimal solution
3. Interpretation and Sensitivity
Analysis
How the manager uses the results

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 Three Steps
in Decision
Modeling

Figure 1.1

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 Tax Computation Example
Estimated tax for a self-employed
couple
5% in a retirement account, max $6,000
Personal exemptions of $3,700 each
Standard deduction for married couples
filing jointly is $11,600
Tax brackets are 10% for the first
$17,000, 15% between $17,001 and
$69,000 and 25% between $69,001 and
$139,350

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 Tax Computation Example

Screenshot 1-1A

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 Tax Computation Example
Screenshot 1-1B

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 Break-Even Example

Clock repair shop

Break-even on repaired springs
Profit = (Selling price per unit)
x (Number of units) (Fixed cost)
(Variable cost per unit)
x (Number of units)

Profit = $10X $1,000 $5X

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 Break-Even Example
Screenshot 1-2A

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 Break-Even Example
Screenshot 1-2B

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 Using Goal Seek

Screenshot 1-2C

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 Using Goal Seek

Screenshot 1-2C

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 Possible Problems

Defining the Problem

Conflicting viewpoints
Impact on other departments
Beginning assumptions
Solutions outdated
Developing a Model
Fitting the textbook model
Understanding the model

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 Possible Problems
Acquiring Input Data
Using accounting data
Validity of data
Developing a Solution
Hard-to-understand mathematics
Limitation of only one answer
Testing the Solution
Analyzing the Results
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 Implementation-Not just the
Final Step

Each step affects the implementation

Managers may fear loss of power,
exposing inadequacy, new methods
May prefer quick and dirty techniques

Implementation improves with user

and manager involvement

2013 Pearson Education, Inc. publishing as Prentice Hall 1-20