CHAPTER

Introduction to Managerial
Decision Modeling
PowerPoint presentation to accompany
Balakrishnan/Render/Stair
Managerial Decision Modeling with Spreadsheets, 3/e
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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

Qualitative

Factors cant be quantified

Can be important

May be combined in decision making

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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

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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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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

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

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