XAT 2014 Question 37

Instructions

Read the following case - let and answer the question that follow

Krishna Reddy was the head of a pharmaceutical company that was trying to develop a new product. Reddy, along with his friend Prabhakar Rao, assessed that such products had mixed success. Reddy and Rao realized that if a new product (a drug) was a success, it may result in sales of 100 crores but if it is unsuccessful, the sales may be only 20 crores. They further assessed that a new drug was likely to be successful 50% of times. Cost of launching the new drug was likely to be 50 crores.


Question 37

Now, Reddy and Rao were in a quandary whether the company should go ahead and market the drug. They
contacted Raj Adduri, a common friend for advice. Adduri was of the opinion that given the risky nature of the launch, it may be a better idea to test the market. Rao and Reddy realized test marketing would cost 10
crores. Adduri told them the previous test marketing results have been favourable 70% of times and success rate of products favourably tested was 80%. Further, when test marketing results were unfavourable; the products have been successful 30% of the times.

How much profit can the company expect to make if the product is launched after favourable test marketing results(assume there are no additional costs)?

Solution

Total Cost = 50+10=60 Cr

Chances of success after favorable results= 80%

Expected return = 100$$\times\ $$0.8+ 20$$\times\ $$0.2=84Cr 

Expected profit= 84-60=24Cr



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