XAT 2014 Question 39

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 39

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 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 favorable 70% of times and success
rate of products favorably tested was 80%.Further, when test marketing results were unfavorable; the products have been successful 30% of the times.

If Rao and Reddy decide to launch the product despite unfavourable test marketing, how much profit can the company expect to earn?

Solution

After testing the market the total cost incurred= 50+10=60Cr.

The product will be a success 30% of times after the marketing test is unfavourable. So the probability of success is 0.3.

The probability of failure= 0.7.

The expected return is = 20 $$\times\ $$ 0.7+100$$\times\$$0.3 = 44Cr.

Total profit= 44-60 Cr=-16Cr.



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