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

Second-round financing, Second-Round Financing This is the introduction...

Second-Round Financing This is the introduction of further funding through original investors or new investors to enable a new organization to deal with finance growth or unexp

Design a digital option as a sequence of calls, An individual agent thinks ...

An individual agent thinks that there is a high probability that the Dow Jones will have a payoff (or points) between a=10000 and b=12000 at t=1. Design a digital option (see Fi

Define how fx futures market be used for price discovery, How can the FX fu...

How can the FX futures market be used for price discovery? Answer:  To the amount that FX forward prices are an unbiased predictor of future spot exchange rates, the market antic

Calculate the net income-asset intensity-return on assets, Analyze a Startu...

Analyze a Startup How would you select an organizational form for a business? Think about this question as you read the following scenario. Joe Jones has created a business

Explain the various source of finance, Explain in detail various sources of...

Explain in detail various sources of finance. Which is the most appropriate one?

Misconceptions of securitization, There are some misconceptions about...

There are some misconceptions about securitization: Poor quality originators end up in securitizing their assets. A bank's best mortgage

Define some of government need imposed on public corporation, What are some...

What are some of the government needs imposed on a public corporation that are not imposed on a private, closely held corporation? Public corporations should submit audited finan

Calculate the quality spread differential, Alpha and Beta Companies can bor...

Alpha and Beta Companies can borrow at the subsequent rates.                                                            Alpha               Beta Moody's credit rating

Traditional mortgages, In US, savings and loan associations con...

In US, savings and loan associations constitute the major originating group of the traditional loans. What types of properties can be mortgaged?

Objectives and functions of asic, Objectives and Functions of ASIC The ...

Objectives and Functions of ASIC The objective of ASIC is to ensure the confident and informed participation of consumers in the financial system. To attain this objective, it

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