XAT 2014 — Decision Making Question 11
Read the following case – let and answer the questions 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.
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 decides to launch the product despite unfavourable test marketing, how much profit can the company expect to earn?
Answer & solution
- A
13.2 crores
- B
36.8 crores
- C
46.8 crores
16 crores
- E
10 crores
Sales if the product is marketed unfavorable = 0.3(100) + 0.7(20) = Rs. 44 crores
Cost of launching the drug = Rs. 50 crores
Cost of test marketing the drug = Rs. 10 crores
Therefore, profit that the company can expect to earn if the product is marketed unfavorable = 44 – 50 – 10
= Rs. −16 crores
Hence, option (d).