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 $3200, and the average first-year commission for each new account opened is $5200. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account.

1. Determine the equation for computing Gustin’s profit per seminar, given values of the relevant parameters. Round your answers to the nearest dollar.
   
   Profit = (New Accounts Opened × $ _____ ) – $_____
   
2. 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.)
   
   The number of new accounts opened is a _____ random variable with ____ trials and ____ probability of a success on a single trial.
   
3. Assume that the number of new accouts you get randomly is:
   

   Simulation Trial	New Accounts
   1	0
   2	1
   3	1
   4	2
   5	0
   6	0
   7	1
   8	1
   9	0
   10	0
   11	0
   12	0
   13	2
   14	1
   15	0
   16	0
   17	0
   18	0
   19	0
   20	1
   21	0
   22	0
   23	0
   24	0
   25	0

   
   Construct a spreadsheet simulation model to analyze the profitability of Gustin’s seminars. Round the answer for the expected profit to the nearest dollar. Round the answer for the probability of a loss to 2 decimal places.
   
   The expected profit from a seminar is $ ___ and there is a ____ probability of a loss.
   
   Would you recommend that Gustin continue running the seminars?
   
   Gustin ____ the seminars in their current format.
   
4. How large of an audience does Gustin need before a seminar’s expected profit is greater than zero? Use Trial-and-error method to answer the question. Round your answer to the nearest whole number.
   
   _____ attendees

Answer 1

Solution

Given that,

Gustan conduct seminar to groups of 25 individuals each seminar costs gustan $3200 and commision on each new account is $5200.

a) Profit per seminar-

Profit = (New Accounts Opened × $ _____ ) – $_____

Profit = (new accounts opened × $ 5200) - $3200

b)Type of random variable is the number of new accounts opened-

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.

c)Spreadsheet simulation model to analyze the profitability of Gustin’s seminars.

Total seminars- 25

Total new accounts opened- 10

Profit/Loss- (25 × 3200) - (10 × 5200) = 80,000 - 52,000

Total Loss of $28,000

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.

d)How large of an audience does Gustin need before a seminar’s expected profit is greater than zero?

Attendents are necessary before the expectation profit from the seminar is greater than zero by a negociable amount.

Trial-and-error shows that, with 70 attendees, the seminar breaks even (the expected profit is very near $0). 71 attendees are necessary before the expected profit from the seminar is greater than zero by a non-negligible amount.