Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
The following structure provides an overview of the case:

I. Revenue
To estimate Sprinker’s potential revenue from private schools, the interviewee should come up with the following equation:
Revenue = Volume * Price
The interviewee must now estimate the volume. Since there are several ways to estimate volume, the interviewer can follow the interviewee’s method as long as the interviewee makes reasonable assumptions.
Information that can be shared if inquired by the interviewee:
First-graders are 7 years old
US population this year: 300 m
Over last 7 years US population grew: 10%
25% of students are in private schools
Life expectancy: 70 years
Each first-grader has 1 book
Price of book = $20
Here is a possible approach based on the replacement concept.
Volume estimation
Let’s first assume that the population has been constant during the last 7 years.
If people live for 70 years (life expectancy) and an equal number of children are born each year, 4.3m children are born every year:
However, if the US population grew by 10% over the last 7 years, the number of children born 7 years ago is:
4.3* (1 - 0.1 ) ≈ 3.9 m
We can round this to 4 m. Assuming that all children born 7 years ago go to school, there are 4 m first-graders in school today. 25% of them (1m) go to private schools.
Revenue estimation
Revenue = Volume * Price
1 m * $20 = $20 m
II. Costs
The interviewee should now ask about costs:
- Investments
- Fixed costs
- Variable costs
- License costs
Share Table 1 about license costs with the interviewee.
Information that can be shared if inquired by the interviewee:
In order to produce the new textbooks, Sprinker must rent a building.
Rental costs = $3 m / year
Equipment investments = $4 m
Manufacturing costs per book = $5
Sprinker must hire a writer to write the textbooks’ content. When signing contracts with writers, Sprinker usually thinks about long-term relationships with the them.
Sprinker pays writers a base payment (one-time payment) and royalties (paid every time a writer’s book is sold).
Writer Costs
Sprinker can choose from 3 writers.
Payment writer #1:
$350,000 + $1.8 *1,000,000 books = $2.15 m
Payment writer #2:
$50,000 + $2.5 *1,000,000 books = $2.55 m
Payment writer #3:
$50,000 + $2 *1,000,000 books = $2.05 m
Based on the current volume, writer #3 is the cheapest options. However, in the long run, the biggest cost are the writer’s royalty payments.
Thus, if Sprinker wants to have a long-term relationship with the writer as per industry norms, they should choose writer #1, because he has the lowest per-book royalty.
Manufacturing Costs
$5 *1,000,000 books = $5 m
Total Costs Year 1
Rental costs + Equip. costs + Manufacturing costs + Payment
= $3 m + $4 m + $5 m + $2.15 m = $14.15 m
Total Profit Year 1
Revenue – Costs = $20m – $14.15m = $5.85 m
III. Competition
The interviewee should now ask about:
Competitors
Market shares
Competitive advantage
The probability that Sprinker’s competitors will win the contract
Information that can be shared if inquired by the interviewee:
3 other companies are also interested in signing the contract with private schools.
Each company (including our client) has an equal chance of winning the contract --> 25% (100%/4).
If our client invests $2 m in a marketing campaign, our client’s chance of winning the contract increases to 80%.
Taking the probability of winning the contract into account, the interviewee should now recalculate the project’s expected profit.
Expected profit without marketing campaign:
$5.85 m * 25% + $0 * 75% ≈ $1.5 m
Expected profit with marketing campaign:
($5.85 m - $2 m) * 80% - $2 m * 20% ≈ $2.7 m
IV. Conclusion
Sprinker should offer their services to private schools.
They should sign a contract with writer #1 and invest money in a marketing campaign. This is due to several reasons:
With the marketing campaign, Sprinker has an 80% chance of winning the contract.
Estimated first-year profit is $2.7 m
Writer #1 has the cheapest per-book royalty. In the long run, this reduces Sprinker’s costs, thus maximizing their long-term profit.
The interviewee can also state risks and other topics that could be investigated.