ExecutiveOverviewCase1

Manyuniversitieshavebeentakingthesteptosignexclusiveagreementswithprivatecompanies
thatrequirethemtosellsolelythatcompanysproduct.AuniversityhasofferedP&CCompany
theexclusiverighttoselltheirbeveragesontheircollegecampus.Thisexclusiverightwould
meanthattheuniversitywouldreceive35%ofalloncampusbeveragerevenuesaswellasa
$200,000lumpsumperyear.P&Cwantstodecidewhethertheyshouldaccepttheexclusive
agreementtoselloncampusoriftheyshouldremainindependent.
Todeterminethis,weneedtofindoutthetotalnumberofbeveragessoldannuallyatthe
university.Fromasurveythatinvestigated500studentsintheuniversity,wefoundthedatawas
independentandnormaldistribution(seePartIAppendixA,Figure1,2).Thenweused1
samplettoestimatetheintervalofthenumberofcansconsumedperindividualperweekat
universitywitha95%confidencelevel.Withthisinformation,wewereabletocalculatethe
possibleprofitearnedbyP&CCompanyintheuniversity(seePartIAppendixA)anddecipher
whetherornottheyshouldenterintoanagreementwiththeuniversityornot.
Accordingtoourcalculation,weare95%confidentthattheintervalofthenumberofcans
consumedperindividualperweekatuniversityis[0.9046,1.0754].Afterthis,wecandetermine
areasonablerangeforthenumberofcansconsumedbytheentireuniversitypopulationperyear,
whichisbetween1,990,160to2,365,800.Theannualnetprofitwithouttheexclusiveagreement
is$880,000andwithexclusiveagreementisbetween$745,326to$923,755(seePartIAppendix
A,Table1,2).Themarketsharerangeis[37.2%,44.2%](seeAppendixA).
Basedonouranalysisfromthecollecteddata,weare95%confidentthatthetrueannualnet
profitwithexclusivityisbetween$745,326and$923,755.Comparedtothecurrentannualnet
profitof$880,000whileindependent,werecommendthatP&Cdoesnot

signanexclusive
agreementwiththeuniversity.
AppendixA
PartI,P&CCompany:Exclusivityvs.Independence

Weassumethatthesampledataisindependentandnormaldistributionfornumberofcans
consumedperindividualperweek.Thesamplesizeissufficientlargewithn=500,whichisalso
lessthan10%ofthepopulation.
Theboxwhiskergraphshowsthattherearenooutliers.

Figure 2

Conf. Intervals (One-Sample)

Sample Size
Sample Mean
Sample Std Dev
Confidence Level (Mean)
Degrees of Freedom
Lower Limit
Upper Limit

Cans Sample
Bottle
Amount
500
0.9900
0.9715
95.0%
499
0.9046
1.0754

Inordertogetthetotalnumberofbeveragessoldannuallyattheuniversity,weneedtoestimate
averagenumberofcansconsumedperindividualperweekatuniversity.
Usetechnology,wecancalculate X =0.99,s=0.9715

Fromproblem,n=500,degreeoffreedom(df)=499

With95%confidence,t0.025,499=1.965

X t*(

s
is[0.9046,1.0754]
n

Thereasonablerangeforthenumberofcansconsumedbytheentireuniversitypopulationper
yearis0.9046*40*55000,1.0754*40*55000,whichisbetween1,990,160to2,365,800.
WeknowthatP&Cwassellinganaverageof22000bottlesperweek.
Annualsales=22,000*40=880,000
Marketsalesrangeis[1990160,2365800]
We divided the number of bottles sold per year by the market sales range in order to assess the
market share range.
Therefore,marketsharerangeis[37.2%,44.2%]

Table1WithoutAgreement
Unitsalesperperiod
SellingPriceperunit
Revenueperperiod(1)
CostperUnit
TotalVariableCostperperiod(2)
NetProfitperperiod(1)(2)

880,000=22,000*40
$1.5
$1,320,000=880,000*$1.5
$0.5
$440,000=880,000*$0.5
$880,000=$1,320,000$440,000

Table2WithAgreement(1)
Unitsalesperperiod
SellingPriceperunit
Revenueperperiod(1)
CostperUnit
VariableCostperperiod

1,990,160
$1.5
$2,985,240=1,990,160*$1.5
$0.5
$99,580=1,990,160*$0.5
3

Costof35%RevenuetoUniversity
TotalVariableCostperperiod(2)
FixedCostperperiod(3)

NetProfitperperiod(1)(2)(3)

$1,044,834=$2,985,240*35%
$1,144,414=$99,580+$1,044,834
$200,000
$1,640,826=$2,985,240$1,144,414$200,000

CalculationTableWithAgreement(2)
Unitsalesperperiod

SellingPriceperunit
Revenueperperiod(1)
CostperUnit
VariableCostperperiod
Costof35%RevenuetoUniversity
TotalVariableCostperperiod(2)
FixedCostperperiod(3)

NetProfitperperiod(1)(2)(3)

2,365,800
$1.5
$3,548,700=2,365,800*$1.5
$0.5
$1,182,900=2,365,800*$0.5
$1,242,045=$3,548,700*35%
$2,424,945=$1,182,900+$1,242,045
$200,000
$923,755=$3,548,700$2,424,945$200,000

Fromtheabovetables,weare95%confidentthatthetrueannualnetprofitwithagreementis
between$745,326to$923,755.
$923,755 - $745,326 = $178,429; $923,755 - $880,000 = $43,755
$43,755 / $178,429 = .245
Thereisonly24.5%possibilitythatP&Ccanearntheprofitmorethan$880,000 with this
given range. If the company rejects the agreement, it can earn $880,000 profit. However, if it
accepts the agreement, it needs to take a higher risk for earning less than $880,000.
Therefore,wedontsuggestP&Centerintotheexclusivityagreementwiththeuniversity.

AppendixB
PartII,Lexico:CoatedCables
1 TypeIerroroccurswhenthenullhypothesisisfalselyrejected.Thisisalsoknownasafalse
positive.

Hypothesis:H0:1,000
Ha:>1,000

Z = / n ,

Usetheformulatogetzvalue Z*=

Find inztable, =0.1335

=1010,n=9,

=27,

=1000

10101000
=1.11
27/ 9

The maximum probability of committing a Type I error is 13.35%.

2.
1SampleZTest
Testingmean=null(versus>null)
Calculatingpowerformean=null+difference
Alpha=0.1335Assumedstandarddeviation=27
Sample
DifferenceSizePower
5

1090.013172
590.047901
090.133500
590.289638
1090.500444
1590.711123
2090.866979
PowerCurvefor1SampleZTest
Power Curve for 1-Sample Z Test
1.0

Sample
Size
9

0.8

Assumptions

0.1335
StDev
27
Alternative
>

Power

0.6

0.4

0.2

0.0

-10

10

20

30

Difference

3.

=0.01,LookingfortheZ intheZtableZ =2.33

=0.05,LookingfortheZ intheZtable,while =1020Z =1.645

n=

( Z +Z )
1 0

2.33+1.645 27
10201000

=28.796,roundupto29

Determine the Z values for both alpha and beta, and then use the equation shown to calculate
the necessary sample size in order to meet the parameters given. We found that a sample size
of 29 is needed in order to meet the specifications.
4.Alpha,beta,andsamplesizeareallinterrelated.Ifoneisleftconstant,thentheothertwowill
fluctuateinaccordancetoeachother.Ifsamplesizeisleftconstant,thenasalphaincreases,beta
willdecrease.Ifoneistokeepalphaandbetalevelsbothatacertainlevel,thentheonlywayto
6

dothatistochangethenumberofobtainedsamples.Thisisexactlywhatwedidinproblem3.
Asthenumberofsamplesincreases,samplestandarddeviationwilldecrease.Itmakessensethat
thenumberoferrors(bothtypeIandtypeII)wouldbelow.Moresamplesmeansthateachsetof
coatedcablesarebeingcheckedmorethoroughly,thusresultinginfewererrors.