Question:

A company faces a decision with respect to a product (code named M997) developed by one of its research laboratories. It has to decide whether to proceed to test market M997 or whether to drop it completely. It is estimated that test marketing will cost Rs100,000. Past experience indicates that only 30% of the products are successful in test market.

If M997 is successful at the test market stage then the company faces a further decision relating to the size of the plant to set up to produce M997. A small plant will cost Rs150,000 to build and produce 2,000 units a year whilst a large plant will cost Rs250,000 to build but produce 4,000 units a year.

The marketing department have estimated that there is a 40% chance that the competition will respond witha similar product and that the price per unit sold (in Rs) will be as follows: (assuming all production sold):

Assuming that the life of the market for M997 is estimated to be 7 years and that the yearly plant running costs are Rs50,000 (both sizes of plant), should the company go ahead and test market M997?