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 $3,500 and the average first-year commission for each new account opened is $5,000. Gustin estimates that for each individual attending the seminar, there is a 0.01 probability that he/she will open a new account.

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

b. What type of random variable is the number of new accounts opened? (hint: Review Appendix 11.2 for descriptions of various types of probability distributions.)

c. Construct a spreadsheet simulation model to analyze the profitability of Gustin’s seminars. Would you recommend that Gustin continue running the seminars?

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

Answer 1

a.

The equation for computing Gustin’s profit per seminar is as written below:

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.

c.

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.

The profitability calculation of Gustin’s seminar in Analytic Solver Platform is as shown below:

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.

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.