The Ohio State University has awarded XYZ Company the exclusive rights to sell h

Question

The Ohio State University has awarded XYZ Company the exclusive rights to sell hot dogs at Ohio State home football games.Ohio State has given XYZ Company the following options in terms of paying a royalty fee to OSU: option #1 - pay OSU a $40,000 fee plus 0% of sales revenue generated; option #2 - pay OSU a $10,000 fee plus 10% of sales revenue generated; option #3 - pay OSU a $0 fee plus 25% of sales revenue generated. XYZ Company has also obtained the following historical sales data: Weather: warm Probability: 30% Sales in Hotdogs: 10,000 Weather: cold Probability: 70% Sales in Hotdogs: 60,000.
XYZ Company will sell the hotdogs for $6 per hot dog.XYZ company's costs,not including the royalty fee,include a variable cost of $2 per hot dog and fixed costs of $18,900.Assume the XYZ Company choosees the royalty fee arrangement that results in its highest expected net income. Calculate the expected royalty cost XYZ Company will pay to Ohio State in its first year of operation.

Explanation / Answer

expected number of sales of hotdog = 0.3*10000 + 0.7*60000 = 45000 sales revenue from selling 45000 hotdogs = 45000*6 - 18900 - 2*45000 = 161100 option 1: 40000 fee option 2 : 10000 + 0.1*161100 = 26110 option 3 : 0.25*161100 = 40275 so option 2 is best for the XYZ company since here they have to give least payment to OSU.

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