Dear Participants,

Some of you reached out to me for understanding the calculations for the decision tree used in the
class yesterday.

Considering the question 11 in the case,

Q11: Suppose that Warrington has scheduled a fact-based movie without a star for a Monday
time slot in March (again, following a show that typically receives ratings of 13.0). Should
Warrington accept Harsanyi Electric's offer or accept the fixed fee of $5,000,000?

Using the regression estimations (Refer to the SPSS outputs on page 3), we can calculate the TV
rating.

1. The Fact has a coefficient of 1.895 and is statistically significant at 95%.

2. Stars is not a significant variable
3. Monday has a coefficient of 2.529 and is statistically significant.
4. The previous rating is statistically insignificant

Therefore:

12.877 (i.e., Intercept) +

1.895 *1 (i.e., coefficient of FACT *1) +

2.529 *1 (i.e., coefficient of MONDAY *1)

= 17.301

It is possible to achieve 19 points rating maybe by choosing a different combination. However, this is
an extreme case and has associated risks based on competition and other external factors. The
model doesn’t account for competitive dynamics.

For deciding about the Harsanyi Electronics’ offer we cannot consider this. In the entire year, only 4
movies have achieved such as high rating. So we need to assess the risk involved by calculating the
Expected Monetary Value (EMV)

The intercept (12.877 from the coefficients table) can be used as the average expected rating and
the SE (1.834 from the model summary table) as the estimate of Standard Deviation.

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 Payment
from H.
Electronics
Based  Base for Management
on Q10 d on Standar  Expecte different s expectation
data   Q10   d Error   d rating rating   of the event   EV
17.301 + -1.3 * 1.834 = 14.92 34,16,800 * 0.2 = 6,83,360
17.301 + -0.5 * 1.834 = 16.38 48,84,000 * 0.2 = 9,76,800
17.301 + 0 * 1 = 17.30 58,01,000 * 0.2 = 11,60,200
17.301 + 0.5 * 1.834 = 18.22 67,18,000 * 0.2 = 13,43,600
17.301 + 1.3 * 1.834 = 19.69 75,00,000 * 0.2 = 15,00,000

EMV 5663960

Based on this specific calculation the EMV of Harsanyi Electronics’ offer is more than the
fixed fee of $5M. the decision can be to accept the offer.

However, it is a high-risk decision. The average and median ratings for CBS are 13.25 and
13.36, respectively. Hence, the above estimates are likely to be overestimated. I am attaching
a worksheet with this document, and you can change the average rating in the cell highlighted
in yellow. At about 16.5 points rating the offer seems to be breaking even. CBS has a rating
of above 16.5 only three times out of thirty movies. All these three networks achieved above
16.5 ratings ten times out of eighty-eight movies.
It is important to recognize the model has not captured many other influencers and
competitive dynamics.

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Regression outputs
Model Summary
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .739 a
.546 .480 1.8340
a. Predictors: (Constant), Competition, DEC, Stars, OCT, BBS,
APR_MAY, Fact, SUN, PreviousRatings, MON, ABN

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 12.877 2.012 6.400 .000**
Fact 1.895 .440 .368 4.303 .000**
Stars .744 .421 .158 1.767 .081
PreviousRatings .186 .109 .236 1.708 .092
BBS -1.050 .600 -.174 -1.751 .084
ABN 1.075 1.034 .211 1.039 .302
OCT -1.541 .686 -.185 -2.246 .028*
DEC 1.398 .728 .159 1.921 .059
APR_MAY -1.404 .566 -.233 -2.481 .015*
MON 2.529 1.001 .461 2.525 .014*
SUN 1.526 .706 .302 2.160 .034*
Competition -.294 .110 -.264 -2.660 .010*
a. Dependent Variable: Rating

*p<.05, ** p<.01

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