Pepsis Exclusivity Agreement with a University In the last few years, colleges and universities have signed exclusivity agreements with a variety of private companies. These agreements bind the university to sell that companys products exclusively on the campus. Many of the agreements involve food and beverage firms.A large university with a total enrollment of about 50,000 students has offered Pepsi-Cola an exclusivity agreement that would give Pepsi exclusive rights to sell its products at all university facilities for the next year with an option for future years. Inreturn, the university would receive 35% of the on-campus revenues and an additional lump sum of $200,000 per year. Pepsi has been given 2 weeks to respond.The management at Pepsi quickly reviews what they know. The market for soft drinks is measured in terms of 12-ounce cans. Pepsi currently sells an average of 22,000 cans per week (over the 40 weeks of the year that the university operates). The cans sellfor an average of 75 cents each. The costs including labor amount to 20 cents per can.Pepsi is unsure of its market share but suspects it is considerably less than 50%. A quick analysis reveals that if its current market share were 25%, then, with an exclusivity agreement, Pepsi would sell 88,000 (22,000 is 25% of 88,000) cans per week or3,520,000 cans per year. The gross revenue would be computed as follows:(PLEASE SEE MY COMMENTS BELOW)Gross revenue = 3,520,000 x $.75/can = $2,640,000This figure must be multiplied by 65% because the university would rake in 35% of the gross. Thus, Gross revenue after deducting 35% university take = 65% x $2,640,000 =$1,716,000The total cost of 20 cents per can (or $704,000) and the annual payment to the university of $200,000 are subtracted to obtain the net profit:Net profit = $1,716,000 – $704,000 – $200,000 = $812,000Pepsis current annual profit is40 weeks x 22,000 cans/week x $.55 = $484,000If the current market share is 25%, the potential gain from the agreement is$812,000 – $484,000 = $328,000The only problem with this analysis is that Pepsi does not know how many soft drinks are sold weekly at the university. Coke is not likely to supply Pepsi with information about its sales, which together with Pepsis line of products constitute virtually the entire market.Pepsi assigned a recent university graduate to survey the universitys students to supply the missing information. Accordingly, she organizes a survey that asks 500 studentsto keep track of the number of soft drinks they purchase in the next 7 days. Perform a statistical analysis to extract needed information from data. Estimate with 95% confidence the parameter that is at the core of the decision problem. Use the estimate to compute estimates of the annual profit. Assume that Coke and Pepsi drinkers would be willing to buy either product in the absence of their first choice.a.On the basis of maximizing profits from sales of soft drinks at the university, should Pepsi agree to exclusivity agreement?b.Write a report to the companys executives describing your analysis.
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Should Pepsi agree to exclusivity agreement
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