XAT 2014 — Decision Making Question 9
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.
How much profit can the company expect to make if the product is launched after favorable test marketing results. (Assume there are no additional costs)?
Answer & solution
- A
11.5 crores
- B
10 crores
- C
8.5 crores
- D
13.8 crores
24 crores
Sales if the product is successful = 0.8(100) = 80 crores
Sales if the product is unsuccessful = 0.2(20) = 4 crores
∴ Total expected sales = 80 + 4 = Rs. 84 crores
Cost of launching the product = Rs. 50 crores
Cost of test marketing = Rs. 10 crores
∴ Expected profit of the company if the product is launched after favorable marketing conditions
= 84 – 60 = Rs. 24 crores.
Hence, option (e).