Question related to expected value

• Apr 29th 2011, 04:08 AM
tblake
Question related to expected value
Hi,

The question is:
A previous analysis of historical data of advertising campaigns found that the mean value of orders for promotional goods is \$12.50, with the company earning a gross profit of 20% on each order. The fixed cost of conducting the four promotions next year is estimated to be \$15 000, with a variable cost of \$3.00 per customer for mailing and handling costs.

How large a customer base must the company have to cover the cost of the promotions?

So far I have

0.20 x \$12.50 = 2.50 gross profit per item
15 000 / 2.50 = 6000 customers.

The correct answer is 9231 customers.

I don't know how to incorporate the 3.00 variable in the calculation / where I'm going wrong?

Tom
• May 7th 2011, 08:32 AM
mcp2
Total cost = fixed cost + variable cost. Your total cost will be 15000+3y where y is size of the customer base
• May 8th 2011, 09:33 AM
MEfree30
Not sure if the \$12.50 is the total average order or average sales price per item, but if it is the former, it looks like a \$ loser even without the \$15 K fixed cost:

\$12.50 x .2 = \$2.50 gross profit per order with a \$3.00 cost per customer...not good unless you can expect more than 1 order per customer that you send this to.

If it is the latter, then you need to specify how many items each customer purchases.
• May 8th 2011, 10:22 AM
mcp2
I'm stumped :(, sorry!