1-1

Quantitative
Techniques
 1-2

Why Use Quantitative Techniques?

• Real-life decisions and problems can be managed and
controlled better when modelled and simulated with
mathematical and logical models under certain
assumptions in order to achieve a deterministic solution
Simulation: a technique for experimenting with
mathematical/logical models using a computer.
STEPS:
• Define objective
• Formulate the model
• Validate the model
• Design the experiment
• Conduct simulation
•Evaluate the results
 1-3

Quantitative Models
• Probability Analysis
• Decision Tree
• Gantt Chart
• PERT-CPM
• Linear Programming
• Queuing Theory
• Learning Curves
• Sensitivity Analysis
 1-4

Probability Analysis
• Used in planning and in decision-making under
uncertainty

Probability – a mathematical expression of doubt or

assurance about the occurrence of a chance event.
Values:
Probability of 0 – the event cannot occur
Probability of 1 or 100% - the event is certain to occur
Probability between 0 and 1 – indicates the likelihood of the
event’s occurrence
 1-5

Types of Probabilities
1. Objective Probabilities – calculated from
either logic or actual experience.

2. Subjective Probabilities – estimates of the

likelihood of future events are based on
judgment and past experience.
 1-6

Basic Terms

Joint Probability – both

Mutually Exclusive – if
events will occur two events cannot
Conditional ProbabilityoccurIndependent Events –
simultaneously
– one event will occur the occurrence of one
given that the other event has no effect on
Dependent
event Events –
has already
– the
Payoffthe other event
value
the occurred
occurrence of one
assigned to the
event has an effect on
different outcomes
the other event
from a decision
 1-7

Expected Value
The expected value of an action is calculated by
multiplying the probability of each outcome by its
payoff and summing the products.
Illustration:
White Covered Store sells “balut” in the city’s central bus business
terminal. For the coming weekend, the probability distribution of
the demand for “balut” is as follows:
Estimated Sales in Units Probability
750 units .20
900 units .25
1,300 units .55
 1-8

The estimated demand for “balut” in the coming

weekend using the expected value approach is
Expected Sales in Units Probability Result
750 units x .20 150

900 units x .25 225

1,300 units x .55 715
Expected value 1,090 units

Payoff (Decision Table)

Presents the outcomes (payoffs) of specific decisions
when certain states of nature (events which are not
controllable by the decision-maker) occur. Identify the
best solution given several alternatives, future
conditions and risks
 1-9

Illustration:
Mr. Hon cooks and sells “Pansit in a box”. Each box of pansit is
sold for P50 during regular hours, that is, from 10am to 8pm. If
every box is sold by 8pm, Mr. Hon calls it a day. However, all
unsold boxes by 8pm are sold at half the regular price up to 9 pm.
The variable cost per box is P30. The contribution margin per box
is as follows:
From 10am to 8pm
Selling price 50
Variable cost 30
CM per box 20
After 8pm
Selling price 25
Variable cost 30
Loss per box 5
 1-10
Past experience has shown that the daily sales demand (up to 8pm) and
their probabilities are as follows:
Sales per day Probability
500 boxes .20
600 boxes .70
700 boxes .10

PAYOFF TABLE
Prepare 500 boxes Expected Value of CM
500 boxes (500 x20) P 10,000
600 boxes (500 x20) 10,000
700 boxes (500 x20) 10,000 P 10,000
Prepare 600 boxes Expected Value of CM
500 boxes (500 x20) P 9,500 (100x5)
600 boxes (600 x20) 12,000
700 boxes (600 x20) 12,000 P 11,500
Prepare 700 boxes Expected Value of CM
500 boxes (500 x20) P 9,000 (200x5)
600 boxes (600 x20) 11,500 (100x5)
700 boxes (700 x20) 14,000 P 11,250
 1-11

Expected Value of Perfect Information

(EVPI)
The difference between the expected value without
perfect information and the result if the best action is
taken given perfect information (knowledge of the
certainty of event to occur)
Daily Sales CM per box Total CM Probability Expected
Demand Value
500 boxes 20 10,000 .20 2,000
600 boxes 20 12,000 .70 8,400
700 boxes 20 14,000 .10 1,400
Expected CM given perfect information 11,800
Less: Expected CM using best course of action w/out perfect info. (11,500)
EVPI 300
 1-12

DECISION TREE
A graphic representation of the decision points, the alternative
courses of action available to decision maker, and the possible
outcomes from each alternative as well as the relative
probabilities and the expected values of each event.

Nodes – the intersections in a decision tree

- decision points/ decision node

- change points/ probability nodes

- branches/connectors
 1-13

Advantages:
Facilitate the evaluation of
alternatives by giving the decision
maker a visual presentation of the
expected results of each alternative
Useful when sequential decisions are
involved
Limitations:
Difficult to determine all the
possible events, outcomes, and their
probabilities
May result into a more complex
decision tree which may not be that
easy to use

STEPS:
1. Identify the decision points and the chance points
2. Determine the events that may result from the chance points
3. Estimate the outcomes of each event as well as estimated probabilities
4. Compute the expected values of the payoffs
5. Evaluate the results and choose the best course of action
 1-14

Payoffs Expected Value

(CM)
10,000 10,000 2,000 (10,000x20%)
500 boxes 10,000 7,000 (10,000x70%)
10,000 1,000 (10,000x10%)

600 boxes
11,500 9,500 1,900 (9,500x20%)
Goal: 12,000 8,400 (12,000x70%)
11,450
12,000 1,200 (12,000x10%)

11,250
9,000 1,800 (9,000x20%)
700 boxes 11,500 8,050 (11,500x70%)
14,000 1,400 (14,000x10%)

Decision: Prepare 600 boxes of Pancit to achieve the highest expected

value of payoff (CM)
 1-15

Exercise 2:
Planned to Purchase Actually Purchased
YES NO TOTAL
YES 200 50 250
NO 100 650 750
TOTAL 300 700 1000
Construct a decision tree and answer the following:
1. What is the probability of those who planned to
purchase actually have purchased the item?
2. What is the probability of those who did not plan to
purchase have actually purchased the item?
 1-16

Percentage

Actually
250/1,000 Purchased
200/1,000
Planned
Purchase
50/1,000
Did Not
Actually
Purchase

Set of
House
holds

Actually
Purchased
750/1,000 100/1,000

Did not plan

to Purchase
Did Not
650/1,000
Actually
Purchase
 1-17

Exercise 2:
Construct a decision tree and answer the following:
1. What is the probability of those who planned to
purchase actually have purchased the item?
200/250 = .80 or 80 percent
2. What is the probability of those who did not
plan to purchase have actually purchased the
item? 100/750 = .1333 or 13.33 percent
 1-18

Gantt Chart (Bar Chart)

Shows the different activities or tasks in a project, as well as
their estimated start and completion times
ADVANTAGES:
Illustration:
a. Simple to construct and use,
requiring no special tools or
mathematics . It can be used on all
types of projects.
b. Useful control tool to compare actual T A
completion time with the plan A B
c. Can be used to monitor the progress
of certain activities in a project S C
DISADVANTAGES: K D
Jul Aug Sep Oct Nov Dec
a. Does not show the
interrelationships among the
activities in a project
 1-19

NETWORK ANALYSIS
Program Evaluation and Review Technique (PERT)
A networking technique used for planning and controlling the
activities in a project. It provides management pertinent information
about a project, such as:
• expected completion time of the project;
• scheduled activity from start to finish;
• which part must be finished to avoid making the whole project late
• how resources may be shifted from one part to another
• the progress of each part of the project

PERT Diagram – an arrow diagram on a network showing

the interrelationships or interdependencies of the various activities of
a project. It has an advantage of incorporating probabilistic time
estimates and identifying the critical path
 1-20

Terms/Definitions:
Node - can be called event when all the activities leading
to a node are finished
**Event - represents a specified accomplishment at a
particular instant in time
Branch - represents the activities in a project
**Activity - task to be accomplished. It represents the
time and resources necessary to move from one node or
event to another. Types: SERIES and PARALLEL

Path - a series of activities from start to finish

Critical Path - the longest path through the network
Slack Time - the length of time by which a particular activity can
slip (be delayed) without having any delaying effect on the end event
CPM - a network technique that uses deterministic time and cost
estimates
 1-21

Illustration:
te = 6.5
2 5
3,7, 8

te = 8 te = 7
1 3 6
2, 9, 10 1, 8, 9

Time Estimates 4
to = optimistic time
tm = most likely time
tp = pessimistic time
te = expected time (the average time an activity would require if it were repeated a large
number of times) = (to + 4tm + tp )/ no. of nodes or events
 1-22

Computations on the CRITICAL PATH:

Path # of weeks Remarks
1-2-5-6 14 weeks
(4.5+6.5+3)
1-3-6 15 weeks The CRITICAL PATH or the longest time in
(8+7) the network
1-4-6 8 weeks
(6+2)

Computations on the SLACK TIME

Path Critical Path Time - (less) Slack Time
This Path Time (the length of time the activity can
be delayed without delaying the
entire project time)
1-2-5-6 15 – 14 weeks 1 week
1-3-6 15 – 15 weeks 0
1-4-6 15 – 8 weeks 7 weeks
 1-23

Exercise:
te = 6.5
2 5
3,7, 8

te = 8 te = 7
1 3 6
2, 9, 10 1, 8, 9

Time Estimates 4
to = optimistic time
tm = most likely time
tp = pessimistic time
te = expected time (the average time an activity would require if it were repeated a large
number of times) = (to + 4tm + tp )/ no. of nodes or events
 1-24

Linear Programming
A quantitative technique used to find the optimal solution to short-term
resource allocation problems such as;
a. maximization of the revenue, CM and or profit function
b. minimization of a cost function, subject to constraints, limited
resources and production capacity levels
Methods: 1. Graphical (only two variables)
2. Formula (Simplex method -more than two)

Illustration:
Meemon Corp. produces two products, G Doll and B Doll which must
be processed in 2 dept., Sewing and Finishing. Sewing has 240 hours
available per month, while Finishing has 192 hours. Other infos.
G Doll B Doll
CM/unit P 32 P 24
Required hours per unit:
Sewing 4 hours 2 hours
Finishing 2 4
Required: How many units of G Dolls and B Dolls must be produced to maximize contribution margin?
 1-25

Step 1: Restate the info. in mathematical terms by expressing the objective function and the
constraints
Objective Function: Maximize CM = 32G + 24B
Constraints: 4G + 2B <=240 Sewing constraint
2G + 4B <=192 Finishing constraint
G <=0 Non-negativity constraint
B <=0 Non-negativity constraint

Step 2: Plot the constraints on a graph. Locate and connect the terminal points where one of the
variables is equal to zero
Sewing constraint: Finishing constraint:
If G = 0; B = 120 If G = 0; B = 48
If B = 0; G = 60 If B = 0; G = 96
 1-26

Step 3: Locate the optimal point. It can be located by reading the drawn graph or by solving
algebraically the two equations

1. 4G + 2B = 240
2. 2G + 4B = 192; therefore the optimal point is

B = 24 and G = 48

Step 4: Using the objective function, test the points and see which yields the greatest
contribution margin:

** The optimal point yields the highest total contribution margin . Therefore, the best
product combination is 48 units of G Dolls and 24 units of B Dolls
 1-27

GRAPHICAL METHOD
G
120
115
110
105
100
95
90
85
80
75
70 G = 48
65 B = 24
60
55
50
45
40
35
30
25
20
15
10
5
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 B
 1-28

Simplex Method
Procedure:
1. Prepare objective function
2. Prepare constraints function
3. Eliminate one of the variables using the
constraint function (identify factor for
elimination)
4. Substitute the value identified to the
constraint function used for the elimination
 1-29

Solution:
Objective Function: Maximize CM = 32G + 24B
Constraints: 4G + 2B <=240 Sewing constraint
2G + 4B <=192 Finishing constraint
G <=0 Non-negativity constraint
B <=0 Non-negativity constraint

1st Equation 4G + 2B = 240

2nd Equation - 4G + 8B = 384
(2G + 4B = 192) 2 -6B = -144
-6 -6
B = 24

1st Equation 4G + 2B = 240

4G + 2 (24) = 240
4G + 48 = 240
G = 48 4G = 240 – 48
B = 24 4G =192
4 4
G = 48
 1-30

Exercise: Simplex Method

Javee Corporation produces and sells two products, A and B. The
contribution margin per unit of A is P 12, while that of B is P 18. Two types of
materials, X and Y, are used to produce both products. At present, the
company is experiencing some difficulties in acquiring the said materials, so it
could not produce as much quantity of A and B as it wants to produce. To
properly allocate the available materials and, at the same time, maximize its
total contribution margin, the following model will be used:

Required:
1. Prepare the objective function
2. Prepare the inequality (constraint) functions
3. How many product A and product B will have to be produced to maximize
profit?
 1-31

QUEUING THEORY
Queuing Theory (Waiting-line Theory)
a study of random arrivals at a processing or servicing facility of limited
capacity. It allows the decision-maker to calculate the:
a. Length of future waiting lines
b. Average time spent in line awaiting service or processing
c. Additional facilities required
d. Service level or capacity that minimizes waiting and operating costs

COSTS INVOLVED:

a. Facility and Operating Costs - the cost of providing service

b. Waiting Cost - the cost of idle resources waiting in line, including the income foregone
(opportunity cost) in the case of waiting customers

OBJECTIVE OF QUEUING THEORY: To minimize total costs

 1-32

Formulas for a Single Service Facility and Random

Arrival of Working Units
1. N = B
where: N = ave. no of work units waiting in line or being serviced
T-B B = ave. no of work units arriving in one unit of time
T = ave. no of work units serviced in one unit of time

It is assumed that B/T < 1, otherwise, the queue will grow to infinite
length

2. Nq = B2 where: Nq = ave. no in the waiting in line

T(T-B)

3. W = Nq where: W = ave. waiting time before service

B
 1-33

Example:
In a supermarket, customers arrive at the cashier’s counter at
the average rate of 20 customers per hour . The cashier can
serve an average of 30 customers per hour.
In this example, B = 20; T = 30

1. The ave. no. of customers waiting in line or paying for

their groceries at any time is: 2 customers

2. The ave. no. of customers in the waiting line, not being

serviced, is: 1 1/3 customers

3. The ave. waiting time is: .0667 hour or 4 minutes

 1-34

Exercise:
Clients arrive at an ATM booth at an average of 10 clients per
hour. The ATM can serve (process requests: balance inquiry:
fund transfer, withdrawals, bills payment, etc.) at an average
rate of 12 clients per hour.

1. The ave. no. of customers waiting in line or doing ATM

transaction at any time is:

2. The ave. no. of customers in the waiting line, not being

serviced, is:

3. The ave. waiting time is:

 1-35

The learning curve model shows a constant

percentage reduction (usually from 20% to 40%)
on the average direct labor input time required
per unit as the cumulative output doubles .
 1-36

Example:
An 80% learning curve means that each time cumulative production is doubled, the
time required to produce is reduced by 20%.

Assume that the first unit takes 100 hours to finish. Each time
cumulative production is doubled, the average time required will
be as follows:
Cumulative Units Ave. Time per unit Cumulative Total Time
First 1 100 hours 100 hours
Second 2 (100 hours x 80 (80 x 2) 160
80%)
Third & Fourth 4 (80 hours x 64 (64 x 4) 256
80%)
Fifth through 8 (64 hours x 51.20 (51.2 x 8) 409.6
Eight 80%)
 1-37

Exercise:
A particular manufacturing job is subject to an estimated 60
percent learning curve.
The first unit required 20 labor hours to complete:

1. A doubling of production will reduce the cumulative

average unit completion time by
2. What is the cumulative average time per unit after
four units are completed
3. What is the cumulative (total) time required to
produce four units?
 1-38

Solution:
A particular manufacturing job is subject to an
estimated 60 percent learning curve.
The first unit required 20 labor hours to complete:
1. A doubling of production will reduce the
cumulative average unit completion time by
(100-60) 40 percent
2. What is the cumulative average time per
unit after four units are completed 7.2 hours
3. What is the cumulative (total) time required
to produce four units? 28.80 hours
 1-39

Sensitivity Analysis
The study of how the outcome of a decision
process changes as one or more of the
assumptions change

Example:
With sales of 100 units, the company’s projected profit is P500:

Sales P 5,000
Less: Variable costs 3,000
Contribution margin P 2,000
Less: Fixed costs 1,500
Profit P 500
 1-40

What would profit be if:

a. Sales in units increases by 20%

b. Variable costs per unit decreases by 5%
c. Fixed costs decreases by P 500?

(a) Present (b) Units (c) VC/u Fixed Cost

data increase by decreases by decreases by
20% 5% P 500
Sales (100 units) 5,000 6,000 5,000 5,000
Less: Variable 3,000 3,600 2,850 3,000
Costs
Contribution 2,000 2,400 2,150 2,000
Margin
Less: Fixed 1,500 1,500 1,500 1,000
Costs
PROFIT 500 900 650 1,000
 1-41

Exercises:

During the last quarter of 2015, ABC Company would like to

establish a projected income statement based on a set of
assumptions:

1. Total sales volume, 1000 units

2. Selling Price is 160 percent of total cost
3. Total Cost is P 200
4. Variable Cost is 60 percent of total cost
5. Total Fixed Cost is 40 percent of contribution margin

Prepare the projected income statement under the following

scenarios

1. Sales volume decrease by 5 percent

2. Variable costs per unit decrease by 5 percent
3. Selling price is P 400
4. Total Fixed Cost increase by 10 percent
 1-42

Exercises:

During the last quarter of 2015, ABC Company would like to

establish a projected income statement based on a set of
assumptions:

1. Total sales volume, 1000 units

2. Selling Price is 160 percent of total cost
3. Total Cost is P 200
4. Variable Cost is 60 percent of total cost
5. Total Fixed Cost is 40 percent of contribution margin

Prepare the projected income statement under the following

scenarios

1. Sales volume decrease by 5 percent (110,000)

2. Variable costs per unit decrease by 5 percent (126,000)
3. Selling price is P 400 (200,000)
4. Total Fixed Cost increase by 10 percent (112,000)
 3-43

Regression Method
Regression analysis (or just regression)
❑ enables to develop a model to predict the values
of a numerical variable, based on the value of
other variables.
❑ identifies type of mathematical relationship that
exists between dependent and independent
variable, to quantify the effect that changes in
the independent variable have on the dependent
variable and to identify unusual observations.
 3-44

Regression Method
Simple Linear Regression Model

y axis Linearity Assumption

b
Note:
Objective:
0 x axis ✓ To formulate the cost
function
✓ Do not include outliers
or abnormal data
 3-45

Regression Method
Simple Linear Regression Model
Yi = B0 + B1 Xi + Ei
Where:

B0 = Y intercept for the population

B1 = slope for the population
Ei = random error in Y for observation i
Yi = dependent variable (response)
Xi = independent variable (explanatory)
 3-46

Regression Method

B0 = represents the mean value of Y when X equals

0
B1 = represents the expected change in Y per unit
change in X
 3-47

Type: Scatter Diagram

Store Square Feet Annual Sales
1 1.7 3.7
2 1.6 3.9
3 2.8 6.7
4 5.6 9.5
5 1.3 3.4
6 2.2 5.6
7 1.3 3.7
8 1.1 2.7
9 3.2 5.5
10 1.5 2.9
11 5.2 10.7
12 4.6 7.6
13 5.8 11.8
14 3.0 4.1
 3-48

Scatter Graph
7

0 1 2 3 4 5 6 7
 3-49

Least-Squares Method
❑Used to find b0 and b1
❑Minimizes the sum of the squared
differences between the actual values (Yi)
and the predicted value (Ýi) using the linear
regression equation: prediction line
Ýi = b0 + b1 Xi
❑The predicted value of Y equals the Y
intercept plus the slope multiplied by the
value of X.
 3-50

Example: Ýi = 0.9645 + 1.6699Xi

Interpretation:
The slope: 1.6699 means that for each
increase of 1 unit in X (data), the predicted
value of Y (data) is estimated to increase by
1.6699 units.

For each increase of 1.0 thousand square

feet in the size of the store, the predicted
annual sales are estimated to increase by
1.6699 millions of dollars.
 3-51

Therefore: What is the predicted annual

sales for a store with 4,000 square feet.

Ýi = 0.9645 + 1.6699Xi
= 0.9645 + 1.6699 (4)
= 7.644 or $ 7,644,000

Thus, a store with 4,000 square feet has a

predicted annual sales of $ 7,644,000
 3-52

Goodness of Fit
Goodness of fit tells us how well the
regression line fits the data, and therefore
suggests to managers how good their
predictions are likely to be. Two potential
measures are:
1. the coefficient of determination (R-
squared).
2. the standard error of the estimate
(Standard Error of Y Estimate).
 3-53

Excel Output
X Y
1 1.7 3.7
2 1.6 3.9 1.669862 slope
3 2.8 6.7 0.964474 intercept
4 5.6 9.5 0.904179 R2 (goodness of fit)
5 1.3 3.4
6 2.2 5.6
7 1.3 3.7
8 1.1 2.7
9 3.2 5.5
10 1.5 2.9
11 5.2 10.7
12 4.6 7.6
13 5.8 11.8
14 3 4.1
 Problem Example 2: (Least-Square)
Chocolite Inc. produces a choco drink. It had the following
production costs and volume for the last five months.

Month Cost (y) Volume (x)

March 6,000 12
April 6,659 14
May 8,370 18
June 8,800 19
July 8,050 17

Using the Least-Square method, compute:

1. Variable cost per case
2. Fixed cost per month
3. Total product cost if the volume of production reaches
20 cases of Chocolite drink.
 1-55

Suggested Answer
X Y XY X2
12 6,000 72,000 144
14 6,659 93,226 196
18 8,370 150,660 324
19 8,800 167,200 361
17 8,050 136,850 289
80 37,879 619,936 1,314

n=5
Equation 1: ∑Y = na + b∑x
Equation 2: ∑xy = ∑xa + b∑x2
 1-56

Suggested Answer
Multiple = ∑x/n = 80/5 = 16 or -16

Equation 1: ∑Y = na + b∑x
[ 37,879 = 5a + b80 ] -16
Equation 2: ∑xy = ∑xa + b∑x2
619,936 = 80a + b1314
+ -606,064 = -80a + b1280
13,872 = 34b
b = 408
Equation 1: ∑Y = na + b∑x
37,879 = 5a + b80
37,879 = 5a + 408(80)
37,879 = 5a + 32,640
5,239 = 5a
a = 1,047.80

Y = a + bx
Y = 1,047.80 + 408b
 1-57

Suggested Answer
Alternative Formula:

b = n ∑xy - ∑x ∑y a = ∑y - b ∑x
n ∑x2 - (∑ x)2 n
Equation 1: b= n ∑xy - ∑x ∑y
n ∑x2 -- (∑ x)2
5 (619,936) – (80)(37,879)
5 (1314) – 80 2
3,099,680 – 3,030,320
6,570 – 6,400
b= 408

Equation 2:
a= ∑y - b ∑x
n
= 37,879 – 80 (408)
5
a= 1,047.80
 Exercise: (Least-Square)
Ceramics Inc. produces ceramic mugs . It had the following
production costs and hours spent for the last six months
Month Cost (y) Hrs. (x)
July 40,000 200
August 32,400 180
September 52,500 350
October 60,000 400
November 43,500 300
December 36,100 190

Using the Least-Square method, compute:

1. Variable cost per mug
2. Fixed cost per month
3. Total product cost if the hours spent reached 500 hours.
 3-59

Game Theory
A technique that simulates rivalries or
conflicts between businesses as a game. The
aim of managers under this technique is to
find ways of gaining at the expense of their
rivals.
 3-60

Information Theory
A rigorous mathematical effort to solve
problems, especially in communication
engineering. It has important implications for
organization design and for machine
relationships.
 3-61

Utility Theory
A technique developed to supplement
statistical probabilities with analysis of
individual preferences in the assumption or
avoidance of risk.
 1-62

The End