Question

As part of your regular year-end audit of a publicly held client, you must estimate the probability of success of its proposed new product line. The client has experienced financial difficulty during the last few years and, in your judgment, a successful introduction of the new product line is necessary for the client to remain a going concern. There are five steps, all of which are necessary for successful introduction of the product: (1) successful labour negotiations between the building trades unions and the construction firms contracted to build the necessary addition to the present plant, (2) successful defense of patent rights, (3) product approval by the Health Branch, (4) successful negotiation of a long-term raw material contract with a foreign supplier, and (5) successful conclusion of distribution contract talks with a large national retail distributor. In view of the circumstances, you contact experts who have provided your firm with reliable estimates in the past. The labor relations expert estimates that there is an 80% chance of successfully concluding labor negotiations before the strike deadline. Legal counsel advises that there is a 90% chance of successfully defending patent rights. The expert on Health Branch product approvals estimates a 95% chance of approval. The experts in the remaining two areas estimate the probability of successfully resolving the raw materials contract and the distribution contract talks to be 90% in each case. Assume these estimates are reliable.

Required:
What is your assessment of the probability of successful product introduction?



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  • CreatedJanuary 09, 2015
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