Lesson 1

INTRODUCTION TO
QUANTITATIVE
ANALYSIS
Learning Objectives
After completing this lesson, students will be able to:
1. Describe the quantitative analysis approach
2. Understand the application of quantitative analysis in
a real situation
3. Describe the use of modeling in quantitative analysis
4. Use computers and spreadsheet models to perform
quantitative analysis
5. Discuss possible problems in using quantitative
analysis
6. Perform a break-even analysis

1-2
Lesson Outline
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 The Quantitative Analysis Approach
1.4 How to Develop a Quantitative Analysis
Model
1.6 Possible Problems in the Quantitative Analysis
Approach

1-3
Introduction
■ Mathematical tools have been used for
thousands of years.
■ Quantitative analysis can be applied to a
wide variety of problems.
– It’s not enough to just know the
mathematics of a technique.
– One must understand the specific
applicability of the technique, its limitations,
and its assumptions.

1-4
Examples of Quantitative
Analyses
■ In the mid 1990s, Taco Bell saved over $150
million using forecasting and scheduling
quantitative analysis models.

■ NBC television increased revenues by over

$200 million between 1996 and 2000 by using
quantitative analysis to develop better sales
plans.

■ Continental Airlines saved over $40 million in

2001 using quantitative analysis models to
quickly recover from weather delays and other
disruptions.

1-5
What is Quantitative Analysis?
Quantitative analysis is a scientific approach
to managerial decision making in which raw
data are processed and manipulated to
produce meaningful information.

Quantitative Meaningful
Raw Data Analysis Information

1-6
What is Quantitative Analysis?
■ Quantitative factors are data that can be
accurately calculated. Examples include:
– Different
Diffe investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost

■ Qualitative factors are more difficult to

quantify but affect the decision process.
Examples include:
– The weather
– State and federal legislation
– Technological breakthroughs.

1-7
The Quantitative Analysis
Approach
Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

Figure 1.1
1-8
Defining the Problem
Develop a clear and concise statement that
gives direction and meaning to subsequent
steps.
– This may be the most important and difficult
step.
– It is essential to go beyond symptoms and
identify true causes.
– It may be necessary to concentrate on only a
few of the problems – selecting the right
problems is very important
– Specific and measurable objectives may have
to be developed.

1-9
Developing a Model
Quantitative analysis models are realistic,
solvable, and understandable mathematical
representations of a situation.

+ b 1X
$ Sales Y= b 0

$ Advertising

There are different types of models:

Scale Schematic
models models

1-10
Developing a Model
Models generally contain variables
(controllable and uncontrollable) and
parameters.
– Controllable variables are the decision
variables and are generally unknown.
■ How many items should be ordered for inventory?
– Parameters are known quantities that are a
part of the model.
■ What is the holding cost of the inventory?

1-11
Acquiring Input Data
Input data must be accurate – GIGO rule:

Garbage
In
Process
Garbage
Out

Data may come from a variety of sources such as

company reports, company documents, interviews, on-
site direct measurement, or statistical sampling.

1-12
Developing a Solution
The best (optimal) solution to a problem
is found by manipulating the model
variables until a solution is found that is
practical and can be implemented.

Common techniques are

– Solving equations.
– Trial and error – trying various
approaches and picking the best result.
– Complete enumeration – trying all
possible values.
– Using an algorithm – a series of
repeating steps to reach a solution.

1-13
Testing the Solution
Both input data and the model should be
tested for accuracy before analysis and
implementation.
– New data can be collected to test the model.
– Results should be logical, consistent, and
represent the real situation.

1-14
Analyzing the Results
Determine the implications of the solution:
– Implementing results often requires change in
an organization.
– The impact of actions or changes needs to be
studied and understood before implementation.

Sensitivity analysis determines how much the

results will change if the model or input data
changes.
 Sensitive models should be very thoroughly tested.

1-15
Implementing the Results
Implementation incorporates the solution
into the company.
– Implementation can be very difficult.
– People may be resistant to changes.
– Many quantitative analysis efforts have failed
because a good, workable solution was not
properly implemented.

Changes occur over time, so even successful

implementations must be monitored to
determine if modifications are necessary.

1-16
Modeling in the Real World
Quantitative analysis models are used
extensively by real organizations to solve
real problems.
– In the real world, quantitative analysis
models can be complex, expensive, and
difficult to sell.
– Following the steps in the process is an
important component of success.

1-17
How To Develop a Quantitative
Analysis Model
A mathematical model of profit:
Profit = Revenue – Expenses

1-18
How To Develop a Quantitative
Analysis Model
Expenses can be represented as the sum of fixed and
variable costs. Variable costs are the product of unit costs
times the number of units.
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units sold)
– [Fixed cost + (Variable costs per unit)
(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

1-19
How To Develop a Quantitative
Analysis
Expenses can Model
be represented as the sum of fixed and
variable costs and variable costs are the product of unit
costs times the number of units
Profit = Revenue – (Fixed cost + Variable cost)
The parameters of this model
Profit = (Selling
are f, v,price
and per
s asunit)(number of units sold)
these are the
–inputs
[Fixedinherent
cost + (Variable costs per unit)
in the model
(Number of units sold)]
The decision variable of interest
Profit = sX
is –
X [f + vX]
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

1-20
Pritchett’s Precious Time Pieces
The company buys, sells, and repairs old clocks. Rebuilt
springs sell for $10 per unit. Fixed cost of equipment to
build springs is $1,000. Variable cost for spring material is
$5 per unit.
s = 10 f = 1,000 v=5
Number of spring sets sold = X
Profits = sX – f – vX

If sales = 0, profits = -f = –$1,000.

–$1,000
If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000

1-21
Pritchett’s Precious Time Pieces
Companies are often interested in the break-even point
(BEP). The BEP is the number of units sold that will
result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f

Solving for X, we have

f = (s – v)X
f
X=
s–v
Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

1-22
Pritchett’s Precious Time Pieces

Companies are often interested in their break-even

point (BEP). The BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit.

0 =BEP
sX –=f$1,000/($10
– vX, or – 0
$5)
= =(s200 units
– v)X –f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
will result in a loss.
f = (s – v)X
Sales of over 200 units of rebuilt springs will
result in a profit. X = f
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

1-23
Advantages of Mathematical
Modeling
1. Models can accurately represent reality.
2. Models can help a decision maker formulate problems.
3. Models can give us insight and information.
4. Models can save time and money in decision making and
problem solving.
5. A model may be the only way to solve large or complex
problems in a timely fashion.
6. A model can be used to communicate problems and
solutions to others.

1-24
Models Categorized by Risk
■ Mathematical models that do not involve risk are called
deterministic models.
– All of the values used in the model are known with
complete certainty.
■ Mathematical models that involve risk, chance, or
uncertainty are called probabilistic models.
– Values used in the model are estimates based on
probabilities.

1-25
Possible Problems in the
Quantitative Analysis Approach
Defining the problem
– Problems may not be easily identified.
– There may be conflicting viewpoints
– There may be an impact on other
departments.
– Beginning assumptions may lead to a
particular conclusion.
– The solution may be outdated.
Developing a model
– Manager’s perception may not fit a textbook
model.
– There is a trade-off between complexity and
ease of understanding.
1-26
Possible Problems in the
Quantitative Analysis Approach
Acquiring accurate input data
– Accounting data may not be collected for quantitative
problems.
– The validity of the data may be suspect.
Developing an appropriate solution
– The mathematics may be hard to understand.
– Having only one answer may be limiting.
Testing the solution for validity
Analyzing the results in terms of the whole organization

1-27
Implementation
There may be an institutional lack of commitment and
resistance to change.
– Management may fear the use of formal analysis
processes will reduce their decision-making power.
– Action-oriented managers may want “quick and dirty”
techniques.
– Management support and user involvement are
There important.
may be a lack of commitment by quantitative
analysts.
– Analysts should be involved with the problem
and care about the solution.
– Analysts should work with users and take their
feelings into account.

1-28
 SAMPLE
PROBLEMS

29
Problem 1:
Gina Fox has started her own company, Foxy
Shirts, which manufactures imprinted shirts for
special occasions. Since she has just begun this
operation, she rents the equipment from a local
printing shop when necessary. The cost of using
the equipment is $350. The materials used in one
shirt cost $8, and Gina can sell these for $15
each.

a)If Gina sells 20 shirts, what will her total

revenue be? What will her total variable cost be?
b)How many shirts must Gina sell to break even?
What is the total revenue for this?

30
ASSIGNMENT

31
Problem 1:
Ray Bond sells handcrafted yard
decorations at county fairs. The variable
cost to make these is $20 each, and he
sells them for $50. The cost to rent a booth
at the fair is $150. How many of these
must Ray sell to break even?

32
Problem 2:
Ray Bond, from Problem (1), is trying to
find a new supplier that will reduce his
variable cost of production to $15 per unit.
If he was able to succeed in reducing this
cost, what would the break-even point be?

33
Problem 3:
Katherine D’ Ann is planning to finance her
college education by selling programs at
the football games for State University.
There is a fixed cost of $400 for printing
these programs, and the variable cost is
$3. There is also a $1,000 fee that is paid
to the university for the right to sell these
programs. If Katherine was able to sell
programs for $5 each, how many would
she have to sell in order to break even?

34
Problem 4:
Katherine D’ Ann, from Problem 3, has become
concerned that sales may fall, as the team is on
a terrible losing streak, and attendance has
fallen off. In fact, Katherine believes that she
will sell only 500 programs for the next game. If
it was possible to raise the selling price of the
program and still sell 500, what would the price
have to be for Katherine to break even by
selling 500?

35
Assignment Instructions:
■ Copy and Answer the problems.
■ Write your complete solution in short bond paper.

36