Page 119 121 Bareng
Page 119 121 Bareng
Page 119 121 Bareng
The EMV amounting to P74,000 is placed in circle 2. However, if Princess Bank plans to establish
a full-blown branch, the EMV will be P100,000, which is determined as follows:
EMV (establish a full-blown branch) = (300,0 x 0.60) + (-200,000 x 0.40)
= P100,000
The EMV amounting to 100,000 is placed in circle 1. The values of circles I and 2 are compared
as the basis of the decision. As the EMV of circle 1 is higher than that of circle 2, the decision is
to establish a full-blown branch.
The complete decision tree appears as follows:
Favorable market condition (0.60)
P300,000
unit
Favorable market condition (0.60)
P150,000
Establish a
Establish a branch-lite unit
full-blown 74,000
branch Unfavorable market condition (0.40)
-P40,000
unit
Discrete distribution refers to the set of values in the distribution that is considered finite. In
other words, the values in the distribution are not continuous. Examples of discrete
distributions are rolling three dice and recording the probabilities of the sum of 3, 4,5, …
The formula to compute for the margins' profit is MP = SP - UC, whereas the formula for
computing the marginal loss per unit is ML= UC - SV.
The basic premise in a marginal analyis that it is advisable or favorable for the business to add a
unit of product to the inventory if the marginal profit is equal to or more than to expected
marginal loss. It is the probability of optimal stocking. In a mathematical equation this
relationship is expressed as:
ML
P≥
MP+ ML
On the other hand, the optimal decision rule is mathematically expressed as:
P(MP)≥(1−P)(ML)
The following are the steps involved in a marginal analysis with a discrete distribution:
1 Determine the value of P.
2. Construct a probability distribution table with an additional column for cumulative
probabilities.
3. Determine the level of inventory wherein the probability of selling at least one additional unit
is greater than P.
Illustration 6
Marginal Analysis with a Discrete Distribution
Angel Delicacies House provides native delicacies to customers. It orders flavored bibingka daily
from its suppliers. One pack contains 12 pieces of bibingka. The past records of Angel Delicacies
House provide the following estimates:
1. 5% probability that 5 packs will be sold
2. 10% probability that 6 packs will be sold
3. 15% probability that 7 packs will be sold
4. 20% probability that 8 packs will be sold
5. 25% probability that 9 packs will be sold
6. 15% probability that 10 packs will be sold
7. 10% probability that 11 packs will be sold
The selling price per pack is P60.00, with a unit cost of P40.00. Unsold bibingka at the end of the
day are sold to a piggery owner at P5.00 per pack.