Question

To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3500, and the average first-year commission for each new account opened is $5000. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account.

Determine the equation for computing Gustin’s profit per seminar, given values of the relevant parameters.

To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3500, and the average first-year commission for each new account opened is $5000. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account. What type of random variable is the number of new accounts opened? Hint: Review Appendix 16.1 for descriptions of various types of probability distributions.

To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3500, and the average first-year commission for each new account opened is $5000. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account.

Construct a spreadsheet simulation model to analyze the profitability of Gustin’s seminars (you'll upload this in the last question of the test). Would you recommend that Gustin continue running the seminars? Why?

To generate leads for new business, Gustin Investment Services offers free financial planning seminars at major hotels in Southwest Florida. Gustin conducts seminars for groups of 25 individuals. Each seminar costs Gustin $3500, and the average first-year commission for each new account opened is $5000. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account.

How large of an audience does Gustin need before a seminar’s expected profit is greater than zero? (Enter the number only)

Answer 1

a.

Profit= (New Accounts * 5000) – 3500

That is:

Profit=Total Commission- Seminar cost:

Where Total Commission= Probability of an attendee opening an account * Total number

of attending persons * average commission

b.

The number of new accounts opened is a binomial random variable with 25 trials and 0.01 probability of a success on a single trial.

A binomial random variable

c.

Incase Gustin conducts 10 seminars per year, there is a chance that he can garner up to 37 new accounts as shown in the binomial simulation above. However, each seminar costs $3500 hence the 10 seminars will cost $35000 and for each of the 37 accounts, the commission for each is $5000 amounting to a total of 185,000. The profit is thus 185,000- $35,000= $150,000. As such, the seminars are profitable and it would be better if Gustin keeps convening the seminars.

The procedure in Analytic Solver Platform to find the profitability calculation of Gustin’s seminar is written below:

1. Click the Analytic Solver Platform tab in the Ribbon.

2. Select the target cell.

3. Click Parameters in the Parameters groupSelect SimulationEnter the values into Values_or_lower.

4. Click OK.

5. Click Options in the Options groupEnter the required simulation value in the box next to Simulations to Run:

6. Click OK.

7. Select the target cell for results.

8. Click Results in the simulation model groupSelect Statistic and click MeanSelect the range accordingly for mean.

Thus, the expected profit from a seminar is -$2,250 and there is a 0.7778 probability that no new accounts will be opened so Gustin should consider discontinuing the seminars in their current format.

d.

Originally, the probability of an individual opening an account when the seminar size is 25 was 0.01 implying that out of the 25 the probability of an account being created is 0.25.

0.01*X*5000=3500

X=3500/ (0.01*5000)=70

X=70

For a seminar to have a profit larger than 0, the number of attendants in any of Gustin’s seminars should include at least 70 persons