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.
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)?
∴ 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).