## 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 ru**n, this **reduces** Sprinker’s **costs**, thus **maximizing** their long-term **profit**.
**The interviewee can also state ****risks** and **other topics **that could be investigated.

**
**