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MANAGEMENT SCIENCE Ash

This document discusses quantitative approaches to management decision-making, specifically marginal analysis techniques. It describes marginal analysis using probabilities to determine optimal inventory levels. Another approach covered is marginal analysis using normal distributions, which is appropriate when the probability distribution of outcomes is normally distributed. The key steps of this approach are to determine marginal profits and losses, identify the relevant mean and standard deviation, locate the target probability area in a normal distribution table, and use a formula to calculate the optimal stocking level based on these parameters. An example problem demonstrates how to use this normal distribution approach to determine the optimal daily inventory of baked spaghetti for a refreshment parlor.

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Cygresy Gomez
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51 views

MANAGEMENT SCIENCE Ash

This document discusses quantitative approaches to management decision-making, specifically marginal analysis techniques. It describes marginal analysis using probabilities to determine optimal inventory levels. Another approach covered is marginal analysis using normal distributions, which is appropriate when the probability distribution of outcomes is normally distributed. The key steps of this approach are to determine marginal profits and losses, identify the relevant mean and standard deviation, locate the target probability area in a normal distribution table, and use a formula to calculate the optimal stocking level based on these parameters. An example problem demonstrates how to use this normal distribution approach to determine the optimal daily inventory of baked spaghetti for a refreshment parlor.

Uploaded by

Cygresy Gomez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MANAGEMENT SCIENCE: A QUANTITATIVE APPROACH TO DECISION-MAKING

Answer. The following steps must be performed to answer the requirements:


Step 1
Determine the value of P. The values of MP and ML are determined as follows:
MP = SP - UC ML = UC - SV
= 60 – 40 = 40 - 5
= ₱20.00 = ₱ 35.00
The value of P is computed as follows:
ML
P=
MP+ ML
35
¿
20+35
= 0.64
Step 2
Construct a probability distribution table with an additional column Probabilities.

Sales per Day (in Pack) Probability of Sale Level Cumulative Probabilities
5 0.05 1.00
6 0.10 0.95
7 0.15 0.85
8 0.20 0.70 𝑃 =≥ 0.64

9 0.25 0.50
10 0.15 0.25
11 0.10 0.10

Step 3
Determine the level of inventory wherein the probability of selling at least one additional unit is
greater than P. Since 0.70 ≥ 0.64, as indicated by the arrow above the number of packs where
the marginal profits will still be greater than the marginal loss is 8 packs. Angel Delicacies House
must, therefore, order 8 packs of flavored bibingka every day.
Illustration 6 can be solved using a payoff table or decision table, but the table will have seven
rows for the level of sales and seven columns for the seven percentages of probabilities This
process is very tedious compared to the marginal analysis approach.
Marginal Analysis with Normal Distributions
Another type of marginal analysis is the marginal analysis with a normal distribution. This
approach is appropriate when there are very large numbers of possible alternatives and states
of nature, and the probability distribution of the states of nature is considered normally
distributed. Normal distribution is a distribution of values in which they are symmetrical to the
mean. The shape of the curve is bell-shaped.
The following are the conditions in a marginal analysis with a normal distribution:
1. The MP and ML can be determined.
2. The mean (µ) and standard deviation (Ꟙ) for the product are known.
3. The probability distribution is normal.
The following are the steps involved in a marginal analysis with a normal distribution:
1. Find the MP, ML, and P.
2. Locate the area of P in the standard normal distribution table.
3. Find the optimal stocking level using the relationship of values in the following formula:
x −μ
Z=
δ
Where :
Z – standard score
X – value of a variable (optimal stocking level)
μ – mean
δ – standard deviation
In statistics, raw data with different units of measurements are transformed into a standard
score or Z-score.

Marginal Analysis with a Normal Distribution


Izzy Refreshment Parlor wants to determine the number of plates of baked spaghetti that it
should order daily from its suppliers to maximize profits. A plate of baked spaghetti has 10
servings, and unsold plates of baked spaghetti are given to a home for the aged. Past sales data
provide the following information:
Selling price per plate - ₱120.00
Cost per plate - ₱48.00
Average plates sold per day (μ ) - 40 plates
Standard deviation (δ ) - 8 plates

Required. Determine the optimal stocking level of baked spaghetti.


Answer. The following are the steps to determine the optimal stocking of Izzy Refreshment
Parlor.

Step 1
Find the MP, ML, and P.
MP = SP – UC ML = UC- SV
=120-48 =48-0
=₱72 =₱48
The value of normal distribution P is computed as follows:
ML
P=
MP+ ML
48
¿
72+ 48
= 0.40

Step 2
Locate the area of P in the standard normal distribution table. Table 1 in the Appendix contains
the values of the standard normal distribution. The area of P =0.4 in the table shows the
corresponding value of Z. Figure 5.1 shows the normal distribution of sales values. The area to
the right of the mean (μ) has positive Z-scores.
The total area of the curve is equal to 1. If P = 0.4 then the area to the left of x is equal to 0.60.
Using 0.60, the Z-score based from the table of normal distribution from Table 1 in the
Appendix is 0.25.

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