Using MS Excel and the data given in the case:
a. Create a histogram of the weekly operating profits from the prior year of operation, using 6 equal sized bins. What is the mode on the histogram? How would you define it? Which probability distribution does the histogram resemble? (You may wish to use the Excel file Harvey's Case.xls at the Gateway web site.)
b. What was the average weekly profit for the prior 12-month period? Determine and define the variance and standard deviation of weekly profit.
c. How confident are you of this estimate? Calculate a 99% confidence interval for weekly profits, assuming that sigma is unknown. What does this tell you about weekly profits?
d. Based on the above, what is the expected exposure on the lost profits claim?
Assume that, based on Q. 2. d. above, Harvey's made an initial settlement offer to Burger. However, on behalf of Burger, Mr. Cooper declined the offer because he felt the offer underestimated the lost profits. He stated that profits from the last six months (26 weeks) before the fire are more indicative of future expected profits. He feels that only data from the last six months should be used to calculate future expected profits.
a. To formally test Mr. Cooper's claim, test to see if there was a significant difference in mean weekly profits between the first 6 months of the year and the last 6 months. Use a 0.05 significance level and assume equal variances. Does this support Mr. Cooper's claim?
b. Having thought about Mr. Cooper's suggestion, you consider several options as an estimate of lost profits. These include 1) the full year, 2) the last six months only, 3) a weighted average that gives twice the weight to the last six months as to the first six months, or 4) some other weighted average. Which method do you think gives the most accurate estimate of lost profits?
Attachment:- harveys-tree-farm-case.rar