The Trumbull Company has developed a new product. Trumbull's chairperson estimates that the new product will increase the firm's revenues by $5 million per year and result in extra out-of-pocket costs of $4 million per year, the fully allocated costs (including a percentage of overhead, depreciation, and insurance) being $5.5 million.
a. Trumbull's chairperson feels that it would not be profitable to introduce this new product. Is the chairperson right? Why or why not?
b. Trumbull's vice president for research argues that since the development of this product has already cost about $10 million, the firm has little choice but to introduce it. Is the vice president right? Why or why not?