MBA 102

Section A
Q1 i
Applications for Quantitative Techniques in Business Decision Making
A small business owner is always making decisions under uncertainty. In the world of
business, nothing is ever done with total confidence that you have made the right decision.
Fortunately, numerous quantitative techniques are available to help organize and assess the
risks of various issues. Quantitative models give managers a better grasp of the problems so
that they can make the best decisions based on the information available. Quantitative
techniques are used by managers in practically all aspects of a business.
Project Management: These techniques are used for optimizing the
allocation of manpower, machines, materials, money and time.
Production Planning and Scheduling: Product mix and scheduling get analyzed
to meet customer demands and maximize profits
Purchasing and Inventory: Quantitative techniques offer guidance on how
much raw material to purchase, levels of inventory to keep and costs to
ship and store finished products.
Marketing: Marketers apply quantitative methods to set budgets, allocate
media purchases, adjust product mix and adapt to customers'
preferences.
Finance: Products get analyzed for profit contribution and cost of
production.
Research and Development: managers look to mathematical projections
about the probability of success and eventual profitability of products to
make investment decisions.
Agriculture: Farmers utilize decision trees and make assumptions about
weather forecasts to decide which crops to plant.

Q1 iii
Understanding what you have, where it is in your warehouse, and when stock is going in and
out can help lower costs, speed up fulfillment, and prevent fraud. Your company may also
rely on inventory control systems to assess your current assets, balance your accounts, and
provide financial reporting.

Inventory control is also important to maintaining the right balance of stock in your
warehouses. You don’t want to lose a sale because you didn’t have enough inventory to fill
an order. Constant inventory issues (frequent backorders, etc.) can drive customers to other
suppliers entirely. The bottom line? When you have control over your inventory, you’re able
to provide better customer service. It will also help you get a better, more real-time
understanding of what’s selling and what isn’t.

You also don’t want to have excess inventory taking up space in your warehouses
unnecessarily. Too much inventory can trigger profit losses––whether a product expires,
gets damaged, or goes out of season. Key to proper inventory control is a deeper
understanding of customer demand for your products.

Q1 iv
Decision criteria are principles, guidelines or requirements that are used to make a decision.
This can include detailed specifications and scoring systems such as a decision matrix.
Alternatively, a decision criterion can be a rule of thumb designed for flexibility.

These are some typical decision criteria:

1. Cost: A budget cost constraint for preference for lower cost options
2. Time: Time requirements such as a father shopping for dinner who decides to find
something that can be prepared in 20 minutes or less
3. Quality: Quality criterion such as a shopper who has decided to give strong
preference to organic food in all purchase decisions.
4. Customer Experience: related criteria such as a traveller who permanently rules out
a particular airline due to several poor customer service experience
5. Performance: requirements such as a business that requires couriers to deliver
within 24 hours such that slower services are excluded from consideration
6. Reliability: requirements such as a government that requires software services to
guarantee 99.95% of higher uptimes in their SLA with significant penalties for SLA
violations
7. Efficiency :criteria such as a specification of the required power efficiency of colling
units for a building
8. Risk: criteria such as traveller who only considers airlines with a stellar reputations
for safety
9. Style: criteria such as a consumer who rules out modern looking furniture
10. Comfort: such as a traveller who never books a hotel room smaller that of 45 square
meters

Q1 v

Following are the disadvantages of linear programming.

Linearity of relations: A primary requirement of linear programming is that the

objective function and every constraint must be linear. However, in real life
situations, several business and industrial problems are nonlinear in nature.

Single objective: Linear programming takes into account a single objective only,

i.e., profit maximization or cost minimization. However, in today's dynamic business
environment, there is no single universal objective for all organizations.

Certainty: Linear Programming assumes that the values of co-efficient of decision

variables are known with certainty. Due to this restrictive assumption, linear
programming cannot be applied to a wide variety of problems where values of the
coefficients are probabilistic.
Constant parameters: Parameters appearing in LP are assumed to be constant,
but in practical situations it is not so.

Divisibility: In linear programming, the decision variables are allowed to take non-
negative integer as well as fractional values. However, we quite often face situations
where the planning models contain integer valued variables.

Q1 viii
Features of Perfect Competition
An essential aspect of perfect competition is the absence of any monopolistic element.
These are the three essential features of perfect competition:
1. The number of buyers and sellers in the market is very large. These buyers and
sellers compete among themselves. Due to the large number, no buyer or seller
influences the demand or supply in the market.
2. The commodity sold or bought is homogeneous. In other words, goods produced by
different firms are identical in nature.
3. Firms can enter or exit the market freely.

Q1 x

Capital budgeting involves choosing projects that add value to a company. The capital
budgeting process can involve almost anything including acquiring land or purchasing fixed
assets like a new truck or machinery. Corporations are typically required, or at least
recommended, to undertake those projects which will increase profitability and thus
enhance shareholders' wealth.
However, what rate of return is deemed acceptable or unacceptable is influenced by other
factors that are specific to the company as well as the project. For example, a social or
charitable project is often not approved based on the rate of return, but more on the desire
of a business to foster goodwill and contribute back to its community.

MBA 102
Section B

Q3
Demand forecasting is the art and science of forecasting customer demand to drive holistic
execution of such demand by corporate supply chain and business management. Demand
forecasting involves techniques including both informal methods, such as educated guesses,
and quantitative methods, such as the use of historical sales data and statistical techniques
or current data from test markets. Demand forecasting may be used in production planning,
inventory management, and at times in assessing future capacity requirements, or in making
decisions on whether to enter a new market.

2] Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated future sales in their
region. The individual estimates are aggregated to calculate the total estimated future sales.
These estimates are reviewed in the light of factors like future changes in the selling price,
product designs, changes in competition, advertisement campaigns, the purchasing power
of the consumers, employment opportunities, population, etc.
The principle underlying this method is that as the salesmen are closest to the consumers
they are more likely to understand the changes in their needs and demands. They can also
easily find out the reasons behind the change in their tastes.
Therefore, a firm having good sales personnel can utilize their experience to predict the
demands. Hence, this method is also known as Salesforce opinion or Grassroots approach
method. However, this method depends on the personal opinions of the sales personnel
and is not purely scientific.
3] Barometric Method
This method is based on the past demands of the product and tries to project the past into
the future. The economic indicators are used to predict the future trends of the business.
Based on future trends, the demand for the product is forecasted. An index of economic
indicators is formed. There are three types of economic indicators, viz. leading indicators,
lagging indicators, and coincidental indicators.
The leading indicators are those that move up or down ahead of some other series. The
lagging indicators are those that follow a change after some time lag. The coincidental
indicators are those that move up and down simultaneously with the level of economic
activities.
4] Market Experiment Method
Another one of the methods of demand forecasting is the market experiment method.
Under this method, the demand is forecasted by conducting market studies and
experiments on consumer behavior under actual but controlled, market conditions.
Certain determinants of demand that can be varied are changed and the experiments are
done keeping other factors constant. However, this method is very expensive and time-
consuming.
5] Expert Opinion Method
Usually, market experts have explicit knowledge about the factors affecting demand. Their
opinion can help in demand forecasting. The Delphi technique, developed by Olaf Helmer is
one such method.
Under this method, experts are given a series of carefully designed questionnaires and are
asked to forecast the demand. They are also required to give the suitable reasons. The
opinions are shared with the experts to arrive at a conclusion. This is a fast and cheap
technique.

Q6 i
A monopoly refers to when a company and its product offerings dominate a
sector or industry. Monopolies can be considered an extreme result of free-
market capitalism in that absent any restriction or restraints, a single company
or group becomes large enough to own all or nearly all of the market (goods,
supplies, commodities, infrastructure, and assets) for a particular type of
product or service. The term monopoly is often used to describe an entity that
has total or near-total control of a market.
Understanding Monopolies
Monopolies typically have an unfair advantage over their competition since
they are either the only provider of a product or control most of the market
share or customers for their product. Although monopolies might differ from
industry-to-industry, they tend to share similar characteristics that include:

 High or no barriers to entry: Competitors are not able to enter the

market, and the monopoly can easily prevent competition from
developing their foothold in an industry by acquiring the competition.
 Single seller: There is only one seller in the market, meaning the
company becomes the same as the industry it serves. 
 Price maker: The company that operates the monopoly decides the
price of the product that it will sell without any competition keeping their
prices in check. As a result, monopolies can raise prices at will.
 Economies of scale: A monopoly often can produce at a lower cost
than smaller companies. Monopolies can buy huge quantities of
inventory, for example, usually a volume discount. As a result, a
monopoly can lower its prices so much that smaller competitors can't
survive. Essentially, monopolies can engage in price wars due to their
scale of their manufacturing and distribution networks such as
warehousing and shipping, that can be done at lower costs than any of
the competitors in the industry.

ii
Monopolistic competition is a type of imperfect competition such that many producers sell
products that are differentiated from one another (e.g. by branding or quality) and hence are not
perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as
given and ignores the impact of its own prices on the prices of other firms. [1][2] In the presence of
coercive government, monopolistic competition will fall into government-granted monopoly.
Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition
are often used to model industries. Textbook examples of industries with market structures
similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service
industries in large cities. The "founding father" of the theory of monopolistic competition
is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of
Monopolistic Competition (1933).[3] Joan Robinson published a book The Economics of Imperfect
Competition with a comparable theme of distinguishing perfect from imperfect competition.
Monopolistically competitive markets have the following characteristics:

 There are many producers and many consumers in the market, and no business has
total control over the market price.
 Consumers perceive that there are non-price differences among the competitors'
products.
 There are few barriers to entry and exit.[4]
 Producers have a degree of control over price.
 The principal goal of the firm is to maximize its profits.
 Factor prices and technology are given.
 A firm is assumed to behave as if it knew its demand and cost curves with certainty.
 The decision regarding price and output of any firm does not affect the behavior of other
firms in a group,i.e., impact of the decision made by a single firm is spread sufficiently evenly
across the entire group. Thus, there is no conscious rivalry among the firms.
 Each firm earns only normal profit in the long run.
 Each firm spends substantial amount on advertisement. The publicity and advertisement
costs are known as selling costs.

Q7
Definition of National Income:
National income of a country means the sum total of incomes earned by the citizens of that
country during a given period, say a year.
It should be noted that national income is not the sum of all incomes earned by all citizens,
but only those incomes which accrue due to participation in the production process.
Individuals participate in the production process by supplying factors of production which
they possess.
There are four factors of production: natural resources or land; human resources or labour;
produced means of production or capital; and entrepreneurs or organisation.
The payment for the use of land is called rent. Payment for the use of labour is known as
wages and payment for the use of capital is known as interest. The factors of production —
land, labour and capital are primary factors of production and their contractual payments
are called factor incomes. The surplus—what is left after the payment of these primary
factors — is called the profit. This residual income is paid to the organiser of production as
profit.
Thus, income for the participation in the production process may take four forms: rent,
wages, interest and profit. By national income we mean the sum-total of all rent, wages,
interest and profit earned in the production process during a given period by all the citizens,
which is known as the factor payments total.
From this definition of national income, we exclude two types of personal income. The first
is transfer payments and the second is capital gains. When a citizen receives a certain sum
of money without participating in the production process it is called transfer payments. For
example, the unemployment benefit, income of a beggar, etc. are personal incomes but not
national income because they provide no services against their receipts.
Again, when we sell out assets which has appreciated in value, and realise a gain it is known
as capital gain which is excluded from the calculation of national income because it renders
no productive service for reaping this gain.

National Income:
It is because goods and services are produced by factors of production that income is
created in the economy, so another way of calculating the value of total output is to add up
all the incomes paid out to the owners of the factors of production. Moreover, it comes to
the same thing to add the values- added by all firms at the different stages of production.
This may be illustrated by a simple example in which production of woollen coat involves
the following three stages of production:
(a) A sheep farmer produces raw wool and sells it to a mill for £100. This represents an
income of £100.00 for the farmer. Value-added = £100.00.
(b) The mill uses the raw wool to produce cloth which it sells to a coat factory for £210. This
represents income of £110 for the mill — remember that £100.00 has had to be paid for the
raw wool. Value-added = £110.00.
(c) The coat factory produces the coat and sells it for £400. This includes £210 to cover the
cost of cloth and £190 to pay incomes including profits. Value-added = £190.
The total value-added in this example (£400.00) is just equal to the value of the final coat; it
is also equal to the sum of all incomes paid at each stage of production. The value of a
country’s total output can be found either by adding the values-added by all firms or by
adding up the incomes (that is, wages + rents + interest + profits) of all factors of
production, those producing intermediate goods as well as those producing final goods.
In either case, double- counting will be avoided. It is important to exclude all transfer
payments as these represent nothing more than a redistribution of income from taxpayers
to the transfer recipients, including them would involve double counting.

Q8

Net Present Value Method:

The objective of the firm is to create wealth by using existing and
future resources to produce goods and services. To create wealth,
inflows must exceed the present value of all anticipated cash
outflows. Net present value (NPV) is obtained by discounting all
cash outflows and inflows attributable to a capital investment
project by a chosen percentage e.g., the entity’s weighted average
cost of capital.

The method discounts the net cash flows from the investment by the
minimum required rate of return, and deducts the initial
investment to give the yield from the funds invested. If yield is
positive the project is acceptable. If it is negative the project in
unable to pay for itself and is thus unacceptable. The exercise
involved in calculating the present value is known as ‘discounting
and the factors by which we have multiplied the cash flows are
known as the ‘discount factors’.

Discount factor = 1/(1+r)n

Where, r = Rate of interest p.a.

n = number of years over which we are discounting.

Discounted cash flow is an evaluation of the future net cash flows

generated by a capital project, by discounting them to their present
day value. The method is considered better for evaluation of
investment proposal as this method takes into account the time
value of money as well as, the stream of cash flows over the whole
life of the project. The discounting technique converts cash inflows
and outflows for different years into their respective values at the
same point of time, allows for the time value of money.

Internal Rate of Return Method:

Internal rate of return (IRR) is a percentage discount rate used in
capital investment appraisals which brings the cost of a project and
its future cash inflows into equality. It is the rate of return which
equates the present value of anticipated net cash inflows with the
initial outlay. The IRR is also defined as the rate at which the net
present value is zero.

The rate for computing IRR depends on bank lending rate or

opportunity cost of funds to invest which is often called as ‘personal
discounting rate’ or ‘accounting rate’. The test of profitability of a
project is the relationship between the IRR (%) of the project and
the minimum acceptable rate of return (%).

The IRR can be stated in the form of a ratio as shown

below:

P.V. of Cash Inflows – P.V. of Cash Outflows = Zero

The IRR is to be obtained by trial and error method to ascertain the

discount rate at which the present values of total cash inflows will
be equal to the present values of total cash outflows.

If the cash inflow is not uniform, then IRR will have to be calculated
by trial and error method. In order to have an approximate idea
about such discounting rate, it would be better to find out the
‘factor’. The factor reflects the same relationship of investment and
cash inflows as in case of payback calculations.

F = I/C

Where, F = Factor to be located

I = Original Investment
C = Average cash inflow per year

In appraising the investment proposals, IRR is compared with the

desired rate of return or weighted average cost of capital, to
ascertain whether the project can be accepted or not. IRR is also
called as ‘cut off rate’ for accepting the investment proposals.