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

Nature of financial management, Q. Nature of Financial Management? Fina...

Q. Nature of Financial Management? Financial Management is an necessary part of Top Management: - In the contemporary business management the financial manager is one of the ac

What are the time dimensions of the income statement, What are the time dim...

What are the time dimensions of the income statement, the balance sheet, and the statement of cash flows?  Hint: Are they videos or still pictures?  Explain. The income stateme

Define effect of stock dividends and stock splits, What is the effect of st...

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock?  Why do corporations declare stock splits and stock dividends? Stock splits

Determine the purchasing in leaminger plc, b) Each $1 of outlay prior to 3...

b) Each $1 of outlay prior to 31 December 2003 would mean a loss in NPV on the alternative project of $0·20. There is so an opportunity cost of using funds in 2002. Purchasing

Define arbitrage process, Q. Define Arbitrage Process ? The basic theor...

Q. Define Arbitrage Process ? The basic theory of the MM approach if we ignore the taxes is that the total value of a firm should be constant irrespective of the degree of leve

Monte-carlo simulation model and option adjusted spread, We have seen...

We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.

What do you mean by sarbanes-oxley, Q. What do you mean by Sarbanes-Oxley? ...

Q. What do you mean by Sarbanes-Oxley? Sarbanes-Oxley (SOX) - Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. Act is designed to oversee the financial

Explain accept-reject criteria, Q. Explain Accept-Reject Criteria? Acce...

Q. Explain Accept-Reject Criteria? Accept-Reject Criteria:- If actual ARR is elevated than the predetermined rate of return .......................Project would be accep

The beta of a firm, Suppose the market portfolio is equally likely to incre...

Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%. a.    Calculate the beta of a firm that goes up on average by 43% when the market goes up a

Net present value, What is Net Present Value? Describe please.

What is Net Present Value? Describe please.

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