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 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. Profit = (New Accounts Opened × ) –

(b) What type of random variable is the number of new accounts opened? (Hint: Review Appendix 11.1 for descriptions of various types of probability distributions.)

(c) Choose the appropriate spreadsheet simulation model to analyze the profitability of Gustin's seminars. (I) (II) (III) (IV) Would you recommend that Gustin continue running the seminars?

(d) How many attendees (in a multiple of five, i.e., 25, 30, 35, . . .) does Gustin need before a seminar's average expected profit is greater than zero?

Answer 1

a) profit = (new account opened x 5000) -3500

b) Opening account is binomial distribution with n =25 and p = 0.01

c) Probability of loss is 0.77781 --I don't recommend the company that it running the seminar

d) n ≅ 71

Explanation:

See attached image