Answer 2.

The EMV of each alternative is determined as follows:

If Princess Bank plans to establish a branch-lite unit, the EMV of this alternative will be P74,000,
which is computed as follows:
EMV (establish a branch-lite unit) = (150,000 x 0.60) + (-40,000 x 0.40)
= P74,000

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

Establish a full-blown branch 100,000

Unfavorable market condition (0.40)
-P200,000

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

Not establish a full-blown branch or branch-lite

0
unit

MARGINAL ANALISIS WITH LARGE NUMBERS OF ALTERNATIVES AND STATES OF NATURE

Marginal Analysis is a decision-making approach that is used when there are either large or
manageable numbers of alternatives and states of nature given in a particular problems. It
complements the EMV and EOI approaches, as these two approaches require that the number
of alternatives and state of nature be few only. Marginal Analysis is a fact that helps in
determining the optimal inventory level without the use of a payoff or decision table.
A problem not sold during the day or week is considered a loss. Examples of these products are
delicacies with short shelf lives, newspapers, and food in fast food chains.
The two approaches to marginal analysis are as follows:
1. Marginal analysis with discrete distributions
2. Marginal analysis with normal distributions

Marginal Analysis with Discrete Distributions

The following are the conditions in a marginal analysis with a discrete distribution:
1. The number of alternatives and states of nature are manageable or few.
2. The probabilities for each state of nature are known.
3. The selling price and marginal loss are known.

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 designations are set as follows:

P - the probability of selling one additional unit or the probability that the demand will be
greater than or equal to the supply
MP - marginal profit or conditional profit
ML - marginal loss
1-P - probability of not selling one unit
P(MP) - expected marginal profit
(I - P) - ML expected marginal loss
SP - selling price
UC - unit cost
SV - salvage value

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.

Required. Perform the following:

1. Determine the marginal profit (MP) per pack.
2. Determine the marginal loss (ML) per pack .
3. Solve for the value of P.
4. Prepare a probability distribution table with an additional column for cumulative
probabilities.
5. Solve for the optimal number of packs to order every day.