Question: 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?
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).