1. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.1 Table of Contents Chapter 1 (Introduction) Special Products Break-Even Analysis (Section 1.2)1.2 – 1.7 Power Notebooks Make or Buy Example1.8 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. Advertising Problem (UW Lecture)1.9 – 1.22 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.

2. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.2 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?

3. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.3 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

4. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.4 Analysis of the Problem

5. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.5 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.

6. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.6 Special Products Co. Spreadsheet

7. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003 1.7 Special Products Co. Spreadsheet