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 has 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
Competition respond 20 35
Competition do not respond 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?

Answer rating: 100% (QA)

Answer Although the above example is somewhat simplified it plainly represents the type of decision ... View the full answer