Question

Performance Tires plans to engage in direct mail advertising. It is currently in negotiations to purchase a mailing list of the names of people who bought sports cars within the last three years. The owner of the mailing list claims that sales generated by contacting names on the list will more than pay for the cost of using the list. (Typically, a company will not sell its list of contacts, but rather provides the mailing services. For example, the owner of the list would handle addressing and mailing catalogs.)

Before it is willing to pay the asking price of $3 per name, the company obtains a sample of 225 names and addresses from the list in order to run a small experiment. It sends a promotional mailing to each of these customers. The data for this exercise show the gross dollar value of the orders produced by this experimental mailing. The company makes a profit of 20% of the gross dollar value of a sale. For example, an order for $100 produces $20 in profit.

Should the company agree to the asking price?

this is one part of the question i am stuck on the other 3 parts i did already

How is the certainty of your decision dependent on the number of names in the sample list? How would, for example, doubling the number of sample names change the certainty of your decision?

Answer 1

Solution

Note: Since ‘The data for this exercise show the gross dollar value of the orders produced by this experimental mailing.’ is not provided, it is not possible to answer the question with figures. However, since the query is basically conceptual, the solution is provided with assumption.

Now to work out the solution,

Let the gross dollar value of the orders produced by this experimental mailing to the

sample 225 names be $x.

Then, profit generated by this sale = 0.2x ......................................................................(1).

[The company makes a profit of 20% of the gross dollar value of a sale.]

To get 225 names, the company pays (225 x 3) = 675 ................................................(2)

Clearly, if 0.2x > 675, it is worth buying the 225 names.

i.e., x > 3375

Thus, company can agree to the asking price of $3, if the gross dollar value of the orders produced by this experimental mailing to the sample 225 exceeds $3375. Answer

[Going beyond,

To make it more general and analytical,

If a name costs $p, n names are purchased and mailing to these n names generates a gross dollar value of $S, then decision would be to buy the names if, 0.2S > np]

DONE