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

Step-up (step down) notes, These types of securities have more ...

These types of securities have more than one coupon rate and each subsequent coupon rate is higher (or lower) than the previous coupon rate. For

Case lets, what type of financing is appropriate to each fim

what type of financing is appropriate to each fim

Securitization, Securitization -Source of financing whereby an entity's ASS...

Securitization -Source of financing whereby an entity's ASSETS (characteristically mortgage loans, lease obligations or other kinds of RECEIVABLES) are placed in a special purpose

Audit opinion, Clean Opinion - AUDIT opinion not qualified for any material...

Clean Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Also called UNQUALIFIED OPINION

Determine about the systems based audit, Determine about the Systems based ...

Determine about the Systems based audit Systems based audit is useful as it would help identify risks within the processes in an organisation and review how adequate the contr

Analyse consumer behaviour, Eatmore & Green Pty. Ltd (Australia) is a succe...

Eatmore & Green Pty. Ltd (Australia) is a successful medium sized marketing consultancy for Australian agricultural products and Australian sourced organic, natural beauty/cosmetic

Normal spread, After the calculation of cash flow yield and the...

After the calculation of cash flow yield and the average life of the asset-backed and mortgage-backed security based on default, prepayment and recovery ass

Describe about comfort letter, Q. Describe about Comfort Letter? Comfor...

Q. Describe about Comfort Letter? Comfort Letter - Letter provided by a company's independent public accountant to an underwriter when underwriter has a DUE DILIGENCE responsib

Investment consultant , Suppose, you are working as an investment consultan...

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of v

Business plan, Identify and describe three types of start ups firms. Give a...

Identify and describe three types of start ups firms. Give an example of one you have dealt with. What is a business plan, what are its major components, and why is it important

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