Manageme CHAPTER 1
nt Science
Learning Objectives:
At the end of the lesson, you should be able to:
1. enumerate the management science process;
2. apply management science on business decision;
3. calculate and analyze the break-even; and
4. appreciate the use of sensitivity analysis in the computation
of break-even.
MANAGEMENT IS…
What is
Manageme
nt? -the art of getting things done through
people.
-Mary Parker
-a distinct process consisting of planning,
organizing, implementing, and controlling
performed to determine and accomplish
stated goals by the use of human being and
resources.
-George R. Terry
Management science is the application of a
scientific approach to solving management
problems to help managers make better
decisions.
It encompasses logical-mathematical
What is approach to problem-solving
Manageme
nt Science? Management science involves a philosophy
of problem-solving in a logical manner.
The founder/Father of Management Science
is Frederick Taylor
Management Science Process
Observation – Identify a problem by closely monitoring the organization.
Definition of the Problem – Clearly define the issue and how it affects
goals.
Model Construction – Build a simplified representation of the problem,
often with equations involving variables (changeable factors) and
parameters (constants).
Model Solution – Apply management science techniques to solve the
model and find the best decision.
Implementation – Put the solution into practice and monitor results.
Example
Maria owns a small café in Cebu that sells coffee and pastries. Over
time, she observes that many of her pastries are left unsold at the
end of each day. This means she is producing more than what
customers actually buy, resulting in food waste and unnecessary
costs.
Realizing this, Maria defines the problem: her café is facing
overproduction, which increases expenses and prevents the
business from reaching its profit goals.
To better understand the situation, Maria constructs a simple model.
She sets up an equation for profit:
Profit=(₱200×units sold)–(₱50×units sold)–fixed costs
Here, the units sold are variables because they change daily, while
₱200 (selling price per pastry) and ₱50 (cost per pastry) are
parameters that remain constant.
Using break-even analysis, Maria solves the model and discovers that
instead of baking 200 pastries per day, she only needs to produce
about 120 pastries to match customer demand and avoid waste.
Finally, Maria implements the solution by adjusting her daily
production to 120 pastries. After a month, she notices that leftovers
are reduced, customer demand is consistently met, and her profits
have improved.
Model Building:
Break-even Analysis
A break-even analysis is a financial
calculation that determines the point at
which a company's total revenue equals its
total costs, meaning it generates neither
profit nor loss.
This "break-even point" indicates the
minimum number of units or revenue
needed to cover all fixed and variable
expenses.
It is a vital tool for businesses to assess
financial viability, set pricing strategies,
manage costs, and forecast sales targets.
When to used break-even
analysis?
What sales are needed
How many units must
to achieve a target What price should a
be sold to avoid a
profit? product be sold at?
loss?
→ Helps managers → Assists in setting the
→ Identifies the
calculate how much more right price by analyzing
minimum sales volume
sales must increase cost–volume–profit
needed to cover both
beyond the break-even relationships.
fixed and variable costs.
point.
Should a company What happens if costs Which product line is
expand production or or prices change? more profitable?
open a new branch? → Measures the impact of → Useful for businesses
→ Determines if the changes in raw material with multiple products, to
additional sales will cover prices, labor costs, or see which items
the extra fixed and selling prices on contribute better to
variable costs. profitability. covering costs.
Components of
Break-even Analysis
Volume
•Refers to sales or production level.
•Measured in units, peso sales, or % of capacity.
Costs
•Fixed Costs (Cf): Do not change with production
volume (e.g., rent, salaries, insurance).
•Variable Costs (Cv): Change per unit produced (e.g.,
raw materials, labor, packaging).
•Total Cost (TC):
TC=cf+vcv
Components of
Break-even Analysis
Profit (Z)
•Difference between Total Revenue
(TR) and Total Cost (TC).
Total Revenue (TR):
TR=vp
where v = volume, p = price per unit
•Profit Formula:
•Z=vp−cf−vcv
Problem 1
A small bakery in Iloilo produces and sells cakes. The selling price of each cake is ₱600.
The bakery incurs the following costs:
• Fixed costs (cf): ₱120,000 per month (rent, salaries, utilities, etc.)
• Variable cost (cv): ₱350 per cake (ingredients, packaging, direct labor)
Currently, the bakery estimates that it can sell 400 cakes per month.
Questions:
[Link] the bakery’s total cost if it sells 400 cakes in a month.
[Link] the bakery’s total revenue if it sells 400 cakes.
[Link] the bakery’s profit or loss at 400 cakes.
[Link] the break-even sales volume (units of cakes).
[Link] the bakery sells 500 cakes, how much profit will it earn?
Sensitivity Analysis
•Definition: Sensitivity analysis studies how changes in parameters (price, fixed
cost, variable cost) affect a model’s results, such as break-even volume and profit.
•Purpose: Since parameters are often uncertain, sensitivity analysis tests how
“sensitive” outcomes are to changes in these values.
•Application:
Increasing the price lowers the break-even volume but may also reduce
demand.
Improving quality raises variable costs, which increases break-even volume.
Increasing advertising raises fixed costs, which also increases break-even
volume.
📌 Things to Remember in Break-Even
Analysis
Increase in Price → Lowers the break-even point (if
costs remain the same).
Increase in Variable Cost → Raises the break-even
point (if price and fixed cost remain the same).
Increase in Fixed Cost → Raises the break-even
point (if price and variable cost remain the same).
THANK YOU
