CHAPTER 1
Introduction to Quantitative Analysis
TEACHING SUGGESTIONS
Teaching Suggestion 1.1: Importance of Qualitative Factors.
Section 1.1 gives students an overview of quantitative analysis. In this section, a number of
qualitative factors, including federal legislation and new technology, are discussed. Students can
be asked to discuss other qualitative factors that could have an impact on quantitative analysis.
Waiting lines and project planning can be used as examples.
Teaching Suggestion 1.2: Discussing Other Quantitative Analysis Problems.
Section 1.2 covers an application of the quantitative analysis approach. Students can be asked to
describe other problems or areas that could benefit from quantitative analysis.
Teaching Suggestion 1.3: Discussing Conflicting Viewpoints.
Possible problems in the QA approach are presented in this chapter. A discussion of conflicting
viewpoints within the organization can help students understand this problem. For example, how
many people should staff a registration desk at a university? Students will want more staff to
reduce waiting time, while university administrators will want less staff to save money. A
discussion of these types of conflicting viewpoints will help students understand some of the
problems of using quantitative analysis.
Teaching Suggestion 1.4: Difficulty of Getting Input Data.
A major problem in quantitative analysis is getting proper input data. Students can be asked to
explain how they would get the information they need to determine inventory ordering or
carrying costs. Role-playing with students assuming the parts of the analyst who needs inventory
costs and the instructor playing the part of a veteran inventory manager can be fun and
interesting. Students quickly learn that getting good data can be the most difficult part of using
quantitative analysis.
Teaching Suggestion 1.5: Dealing with Resistance to Change.
Resistance to change is discussed in this chapter. Students can be asked to explain how they
would introduce a new system or change within the organization. People resisting new
approaches can be a major stumbling block to the successful implementation of quantitative
analysis. Students can be asked why some people may be afraid of a new inventory control or
forecasting system.
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, CHAPTER 1
Introduction to Quantitative Analysis
SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS
1-1. Quantitative analysis involves the use of mathematical equations or relationships in
analyzing a particular problem. In most cases, the results of quantitative analysis will be one or
more numbers that can be used by managers and decision makers in making better decisions.
Calculating rates of return, financial ratios from a balance sheet and profit and loss statement,
determining the number of units that must be produced in order to break even, and many similar
techniques are examples of quantitative analysis. Qualitative analysis involves the investigation
of factors in a decision-making problem that cannot be quantified or stated in mathematical
terms. The state of the economy, current or pending legislation, perceptions about a potential
client, and similar situations reveal the use of qualitative analysis. In most decision-making
problems, both quantitative and qualitative analysis are used. In this book, however, we
emphasize the techniques and approaches of quantitative analysis.
1-2. Quantitative analysis is the scientific approach to managerial decision making. This type of
analysis is a logical and rational approach to making decisions. Emotions, guesswork, and whim
are not part of the quantitative analysis approach. A number of organizations support the use of
the scientific approach: the Institute for Operation Research and Management Science
(INFORMS), Decision Sciences Institute, and Academy of Management.
1-3. The three categories of business analytics are descriptive, predictive, and prescriptive.
Descriptive analytics provides an indication of how things were performed in the past. Predictive
analytics uses past data to forecast what will happen in the future. Prescriptive analytics uses
optimization and other models to present better ways for a company to operate to reach goals and
objectives.
1-4. Quantitative analysis is a step-by-step process that allows decision makers to investigate
problems using quantitative techniques. The steps of the quantitative analysis process include
defining the problem, developing a model, acquiring input data, developing a solution, testing
the solution, analyzing the results, and implementing the results. In every case, the analysis
begins with defining the problem. The problem could be too many stockouts, too many bad
debts, or determining the products to produce that will result in the maximum profit for the
organization. After the problems have been defined, the next step is to develop one or more
models. These models could be inventory control models, models that describe the debt situation
in the organization, and so on. Once the models have been developed, the next step is to acquire
input data. In the inventory problem, for example, such factors as the annual demand, the
ordering cost, and the carrying cost would be input data that are used by the model developed in
the preceding step. In determining the products to produce in order to maximize profits, the input
data could be such things as the profitability for all the different products, the amount of time
that is available at the various production departments that produce the products, and the amount
of time it takes for each product to be produced in each production department. The next step is
developing the solution. This requires manipulation of the model in order to determine the best
solution. Next, the results are tested, analyzed, and implemented. In the inventory control
problem, this might result in determining and implementing a policy to order a certain amount of
inventory at specified intervals. For the problem of determining the best products to produce, this
might mean testing, analyzing, and implementing a decision to produce a certain quantity of
given products.
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,1-5. Although the formal study of quantitative analysis and the refinement of the tools and
techniques of the scientific method have occurred only in the recent past, quantitative approaches
to decision making have been in existence since the beginning of time. In the early 1900s,
Frederick W. Taylor developed the principles of the scientific approach. During World War II,
quantitative analysis was intensified and used by the military. Because of the success of these
techniques during World War II, interest continued after the war.
1-6. Model types include the scale model, physical model, and schematic model (which is a
picture or drawing of reality). In this book, mathematical models are used to describe
mathematical relationships in solving quantitative problems.
In this question, the student is asked to develop two mathematical models. The student might
develop a number of models that relate to finance, marketing, accounting, statistics, or other
fields. The purpose of this part of the question is to have the student develop a mathematical
relationship between variables with which the student is familiar.
1-7. Input data can come from company reports and documents, interviews with employees and
other personnel, direct measurement, and sampling procedures. For many problems, a number of
different sources are required to obtain data, and in some cases it is necessary to obtain the same
data from different sources in order to check the accuracy and consistency of the input data. If
the input data are not accurate, the results can be misleading and very costly to the organization.
This concept is called “garbage in, garbage out.”
1-8. Implementation is the process of taking the solution and incorporating it into the company
or organization. This is the final step in the quantitative analysis approach, and if a good job is
not done with implementation, all of the effort expended on the previous steps can be wasted.
1-9. Sensitivity analysis and post optimality analysis allow the decision maker to determine how
the final solution to the problem will change when the input data or the model change. This type
of analysis is very important when the input data or model has not been specified properly. A
sensitive solution is one in which the results of the solution to the problem will change
drastically or by a large amount with small changes in the data or in the model. When the model
is not sensitive, the results or solutions to the model will not change significantly with changes in
the input data or in the model. Models that are very sensitive require that the input data and the
model itself be thoroughly tested to make sure that both are very accurate and consistent with the
problem statement.
1-10. There are a large number of quantitative terms that may not be understood by managers.
Examples include PERT, CPM, simulation, the Monte Carlo method, mathematical
programming, EOQ, and so on. The student should explain each of the four terms selected in his
or her own words.
1-11. Many quantitative analysts enjoy building mathematical models and solving them to find
the optimal solution to a problem. Others enjoy dealing with other technical aspects, for
example, data analysis and collection, computer programming, or computations. The
implementation process can involve political aspects, convincing people to trust the new
approach or solutions, or the frustrations of getting a simple answer to work in a complex
environment. Some people with strong analytical skills have weak interpersonal skills; since
implementation challenges these “people” skills, it will not appeal to everyone. If analysts
become involved with users and with the implementation environment and can understand
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, “where managers are coming from,” they can better appreciate the difficulties of implementing
what they have solved using QA.
1-12. Users need not become involved in technical aspects of the QA technique, but they should
have an understanding of what the limitations of the model are, how it works (in a general
sense), the jargon involved, and the ability to question the validity and sensitivity of an answer
handed to them by an analyst.
1-13. Churchman meant that sophisticated mathematical solutions and proofs can be dangerous
because people may be afraid to question them. Many people do not want to appear ignorant and
question an elaborate mathematical model; yet the entire model, its assumptions and its
approach, may be incorrect.
1-14. The break-even point is the number of units that must be sold to make zero profits. To
compute this, we must know the selling price, the fixed cost, and the variable cost per unit.
1-15. f = 350 s = 15 v=8
a) Total revenue = 20(15) = $300
Total variable cost = 20(8) = $160
b) BEP = f/(s - v) = 350/(15 - 8) = 50 units
Total revenue = 50(15) = $750
1-16. f = 150 s = 50 v = 20
BEP = f/(s − v) = 150/(50 − 20) = 5 units
1-17. f = 150 s = 50 v = 15
BEP = f/(s − v) = 150/(50 − 15) = 4.29 units
1-18. f = 400 + 1,000 = 1,400 s=5 v=3
BEP = f/(s − v) = 1,400/(5 − 3) = 700 units
1-19. BEP = f/(s − v)
500 = 1,400/(s − 3)
500(s − 3) = 1,400
s − 3 = 1,400/500
s = 2.8 + 3
s = $5.80
1-20. f = 2,400 s = 40 v = 25
BEP = f/(s − v) = 2,400/(40 − 25) = 160 per week
Total revenue = 40(160) = $6,400
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