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

Buying and selling securities, Buying and Selling Securities One of the k...

Buying and Selling Securities One of the key features that may occur while investing in financial markets is that sometimes investors overlook the essential factors they should c

Explain about receivables management, Q. Explain about receivables manageme...

Q. Explain about receivables management? Receivable Management: - The term receivables demote to debt owed to the firm by the customers resulting from sale of goods or else ser

Linear programming, Linear programming, one of the ...

Linear programming, one of the important techniques of operations research, has been applied to a wide range of business problems. This techniqu

How to solve problems, I need help solving problems for learning financial ...

I need help solving problems for learning financial management?

State about the nick leeson and barings, Nick Leeson and Barings Leeson...

Nick Leeson and Barings Leeson was the trader who managed to bring about the collapse of Barings Bank in 1995. The main reason he was able to do this was because there was a ce

Federal agency securities, Federal Agency Securities are those securi...

Federal Agency Securities are those securities issued by federally related institutions and those issued by Government-Sponsored Enterprises (GSE). Securities iss

Define limit of theory of comparative advantage is realistic, What consider...

What considerations might limit the extent to which the theory of comparative advantage is realistic? Answer: The theory of relative advantage was initially advanced by the ninet

Currency denomination, The payment that the issuer makes to the bondh...

The payment that the issuer makes to the bondholder can be in any currency. The contract at the time of bond issue between the issuer and the investor can specify

What is planning, What is Planning Internal auditors must plan the audi...

What is Planning Internal auditors must plan the audit work so as to perform the audit in an effective manner.There must be sufficient audit programmes in existence which set o

Hazard or risk, the procedures, techniques or strategies that could or shou...

the procedures, techniques or strategies that could or should be implemented to reduce the likelihood of harm > actions that could be taken to eliminate the hazard or reduce the r

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