ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

DIFFERENTIAl ANALYSIS

Updated on November 3, 2011

Lake Nakuru, Kenya

On his first day, Jim Kiniti was called by Senior Manger Finance in his spacious office at the Development Bank of Kenya. There were two other young officers. Addressing the three, the Manager asked them to prepare a preliminary proposal for setting up of a Fertilizer Plant. “We have to settle on some basic issues of location, market and technology”, said he while passing a folder to them.

Indeed, it was a complex situation. The plant could be located at Nairobi or Nakuru, the market could be local or export and in technology, there were two choices: capital intensive or labour intensive. This may entail as many as eight earning forecasts which is quite mind boggling. Though fresh from University, Kiniti solved the problem in a short time through Differential Analysis.

“What is common in various scenarios is not relevant to us”, he started confidently. Continuing he said that we must look at spots where there were differences and pickup the best. This eased the task and they came up with a suggestion that the plant maybe located at Nakuru using capital intensive technology for exporting the product to the neighboring countries. When they went to the manager with their suggestions, he shouted, “Bring me the calculations and not what you feel, you dummies”

 

Before jotting down hard facts of the case, let me briefly comment on the three cities to be described in this proposal:

1. NAIROBI: Situated at an elevation of 1660 m, Nairobi is the capital of Kenya. It is popularly known as the “Green City in the Sun” and attracts a large of tourists despite being labeled as “dangerous”. It is developing fast as an industrial city and creating jobs which would hopefully reduce street crimes like “snatch and run”.

2. Nakuru lies at a distance of 150 km from Nairobi. It has plenty of tourist attractions being home to Lake Nakuru famous for a vast number of flamingoes.

3. Kisumu: About 200 km away, is a place called Kisumu. It literally means a “place of barter trade”. It is a port-city on Lake Victoria, a freshwater body second only to Lake Michigan in the USA. It is an export point to the neighboring countries of Uganda and Tanzania.

Now I would briefly narrate background information on the case:

1. The plant would produce 10,000 tons of fertilizer each year.

2. Raw Material costs would be $.50 per ton.

3. Raw Material Requirements would be three times of the finished goods.

4. Transport cost would be $0.25 per ton per km

5. The plant could be located at Nairobi or Nakuru.

6. The product can be sold locally at $725 or exported at $825 FOB Kisumu. Exports fetch higher prices due to logistic reasons and higher demand.

7. Location could be near Raw Material source ( Nakuru ) or Nairobi, which is main local market.

8. If labour intensive technology is used, the capital costs would be six million dollars which in case of capital intensive would be much higher at $13 million.

9. Unit Costs would be $.824 in case of Labour Intensive and much lower at $.734 per ton for the alternate.

The working is given as under:

 

Differential Analysis makes life easy.  It would lead to the same decision which can be taken through simulation i.e. trying all possible out-comes.

Sometimes, Differential Analysis is considered the same as Incremental Analysis or Marginal Analysis.  Differential Analysis differs from the two others as it finds a difference between two independent proposals and not additional cost or price or productivity.  If we are considering what would be addition in cost if another unit is produced, this would be known as incremental costs.  But what would be additional investment, if we discard a weaving plant and go for a sugar plant.  If so, we are in the area of Differential Analysis.

Marginal Analysis and Incremental Analysis are, however, the same.

 

 

Comments

    0 of 8192 characters used
    Post Comment

    • forlan profile image

      forlan 

      9 years ago

      it is good hubs. thank hafeez

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      9 years ago from Pakistan

      Hi Shahnawaz Sheikh,

      I have written a case study on socio-economic appraisal. As a banker, we always visioned what would be impact of this project on society (which we take as poorest of the poor). There was quite a debate when appraisal of a machine-made carpet came up. Many argued that machine-made carpet would result in a wide spread unemployment among workers engaged in hand-knotted carpet industry. Some said that the two had different markets because of substantial price differences 1:10 and hence demand of hand-knotted carpet, which is a luxury item mostly used as wall hanging, would remain un-affected. This is true and it was followed by jute carpet which was still cheaper. Please to go to the following hub:

      https://hubpages.com/education/CASE-STUDY-SOCIO-EC...

    • profile image

      asifkamran 

      9 years ago

      learn a lot about the case about

    • shahnawaz sheikh profile image

      shahnawaz sheikh 

      9 years ago from karachi

      sir an intresting illustration of some what a diffcult to understand topic

      sir here as we can see clearky see that a capital intensive project will be choosen and as an engineer my self i believe that atomation is a way for the future but i am also courious for a labor intensive project

      i will be very thankful if you can also identify a senerio where a Labor intensive project will be chosen insted of a Capital Intensive

      thank you again sir for a intesting hub

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)