A company faces a decision with respect to a product (codenamed 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 £100K. Past experience indicates that only 30% of 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 plant to set up to produce m997. A small plant will cost £150K to build and produce 2000 units a year whilst a large plant will cost £250K to build but produce 4000 units a year. The marketing department have estimated that there is a 40% chance that the competition will respond with a similar product and that the price per unit sold (in £) will be as follows (assuming all production sold): Large plant Small plant Respond to competition 20 35 Not respond to competition 50 65 Assuming that the life of the market for M997 is estimated to be 7 years and that the yearly plant running costs are £50K (both sizes of plant - to make the numbers easier!) should the company go ahead and test market M997?
A company faces a decision with respect to a product (codenamed 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 £100K.
Past experience indicates that only 30% of 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 plant to set up to produce m997. A small plant will cost £150K to build
and produce 2000 units a year whilst a large plant will cost £250K to build but produce 4000
units a year.
The marketing department have estimated that there is a 40% chance that the competition
will respond with a similar product and that the price per unit sold (in £) will be as follows
(assuming all production sold):
| Large plant | Small plant | |
| Respond to competition | 20 | 35 |
| Not respond to competition | 50 | 65 |
Assuming that the life of the market for M997 is estimated to be 7 years and that the yearly
plant running costs are £50K (both sizes of plant - to make the numbers easier!) should the
company go ahead and test market M997?
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