Allan Rey B.

Aventurado
MBA103

Solution:

Based on the computation, the probability of having 23% defective items is 58%.

If the insurance company wanted that the defective item to be just between 10-15% with around 99%
probability follows that the percentage of defective items would be 14%
Analysis/Recommendations

As shown in the computation, there is a probability of 58% that there would be 23% defective items.
Moreover, given the identified alpha and beta values, there is a probability of 99% that there would be
around 28% defective items.

Now, the insurance company wanted that the percentage of defect is only between 10% to 15%. Setting
a 99% probability, maximum percentage of damage it could allow is only 14% (as shown in the second
computation).

Given all these information, the shipping company should really take into consideration the risks before
subscribing to what the insurance company is offering. Though the technology it has provides security of
shipments because data on factors affecting its damage are recorded and kept, it still does not guarantee
lower percentage of defects. What the shipping company wants basically does not meet with what the
insurance company can offer since there is quite a wide gap of around 50%. The shipping company wants
that its 28% defective items which is highly probable during shipment will be incurred, while the insurance
company only wants to commit to maximum of 14% defective items. Thus, the proposal is more favorable
to the insurance company than the shipping company.

I recommend that the shipping company should continue negotiation that the insurance company would
increase its coverage in terms of percentage of defective items. If the insurance company won’t
compromise, it is not worth for the shipping company.