Marginal analysis, Financial Management

Assignment Help:

MARGINAL ANALYSIS

It is difficult to develop the conditional profit table when there are a large number of scenarios and possible actions. The marginal analysis approach sidesteps an unmanageable conditional profit table. We will illustrate the procedure and its advantages through the following example.

Example 

 

The fresh from the fields, vegetable and fruit wholesalers buys, produce and then sells to retailers. Currently, green peas are available. The wholesaler pays Rs.200 per box of peas. A box sold on the same day fetches Rs.300, otherwise it has a salvage value of Rs.50. Historical data has established the following demand for green peas.

Number of boxes

21

22

23

24

25

26

27

28

Probability

0.07

0.08

0.10

0.11

0.29

0.20

0.09

0.06

The wholesaler has decided to stock the optimal number of boxes based on the expected profit criterion.

Let us solve the problem using the conditional profit table. Note that the profit generated by the sale of one box is Rs.100 and the loss incurred on an unsold box is Rs.150.00.

Conditional Profit Table

Stocking level

Daily Demand

Expected profit

21
(0.07)

22
(0.08)

23
(0.10)

24
(0.11)

25
(0.29)

26
(0.20)

27
(0.09)

28
(0.06)

21

22

23

24

25

26

27

28

2100

1950

1800

1650

1500

1350

1200

1050

2100

2200

2050

1900

1750

1600

1450

1300

2100

2200

2300

2150

2000

1850

1700

1550

2100

2200

2300

2400

2250

2100

1950

1800

2100

2200

2300

2400

2500

2350

2200

2050

2100

2200

2300

2400

2500

2600

2450

2300

2100

2200

2300

2400

2500

2600

2700

2550

2100

2200

2300

2400

2500

2600

2700

2800

2100.00

2182.50

2245.00

2282.50

2292.50

2230.00

2117.50

1982.50

From the table, we see that the optimal stocking level is 25 (which generates the maximum expected profit of Rs.2,292.50).

As it can be seen, this approach is tedious and the conditional profit table is bound to become unmanageable.

 


Related Discussions:- Marginal analysis

Straight value (pure debt value), The straight value of a convertible...

The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw

Cash budget, We need to have done some exploration work on all of the major...

We need to have done some exploration work on all of the major projects for inclusion in our prospectus, but of our $4m we need at least $1m in the bank to pay for all the listing

Explains the reason for the negative synergistic gains, What can be the rea...

What can be the reason for the negative synergistic gains for British acquisitions of U.S. firms? Negative synergies for British acquisitions of U.S. firms (united state firms) m

State the factors of tests of controls, State the factors of Tests of contr...

State the factors of Tests of controls Tests of controls may include · Enquiries and observations corroborating internal control functions. Inspection of docu

Calculate super normal profit, The economic analysis is done for Schlumberg...

The economic analysis is done for Schlumberger, oilfield service company. They are # 1 in terms of market caps, revenue and employees globally. If any references are used / outside

Core Concepts, Do you have Textbook solutions for Financial Management Core...

Do you have Textbook solutions for Financial Management Core Concepts Author: Raymond M. Brooks. ISBN 978-0-13-267103-3.

Debentures, Debentures are also fixed income securities with a ...

Debentures are also fixed income securities with a specified interest rate. These securities have charge over the assets of the issuer. In contrast to

Evaluate optimum price of the new machine, Q. Evaluate optimum price of the...

Q. Evaluate optimum price of the new machine? The optimum price will be the one which optimises total contribution over the five-year life of the new machine. Sales price o

Case study, what are the assumptions of MM(Modigliani Miller) approach

what are the assumptions of MM(Modigliani Miller) approach

Other types of bonds, Various other types of bonds are- 1. Domestic Bond...

Various other types of bonds are- 1. Domestic Bonds 2. Foreign Bonds 3. Euro Bonds  4. Global Bonds 5. Floating Rate-Bonds

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd