Directions (Qs. 1-4) : Answer the questions based on the following information.
Ram Roy was the head of a Steel manufacturing company that was trying to develop a new product. Roy, along with his friend Prashant Agrawal, assessed that such products had mixed success. Roy and Agrawal realized that if a new product (a drug) was a success, it may result in sales of 100 crores but if it is unsuccessful, the sales may be only 20 crores. They further assessed that a new drug was likely to be successful 50% of times. Cost of launching the new drug was likely to be 50 crores.
Now, Roy and Agrawal were in a quandary whether the company should go ahead and market the drug. They contacted Raj Adhikar, a common friend for advice. Adhikar was of the opinion that given the risky nature of launch, it may be a better idea to test the market. Agrawal and Roy realized test marketing would cost 10 crores. Adhikar told them the previous test marketing results have been favorable 70% of times and success rate of products favorably tested was 80%. Further, when test marketing results were unfavorable/the products have been successful 30% of the times.
Question 1 : How much profit can the company expect to earn if it launches the new drug (suppose there are no additional costs)?
A. 12 crores
B. 10 crores
C. 10.5 crores
D. 11 crores
E. 11.5 crores
Question 2 : If Agrawal and Roy decides to launch the product despite unfavorable test marketing, how much profit can the company expect to earn?
A. 10 crores
B. –13.2 crores
C. –36.8 crores
D. –46.8 crores
E. –16 crores
Question 3 : How much profit can the company expect to make if the product is launched after favorable test marketing results.(assume there are no additional costs)?
A. 13.8 crores
B. 11.5 crores
C. 8.5 crores
D. 10 crores
E. 24 crores
Question 4 : What is the probability of product failure if Roy and Agrawal decides to test market it?
E. Cannot be computed
Answers and Explanations
Answer 1 : (B)
The cost of launching the product = 50 crores
The probability of the success of the product is 50%.
Hence, the profit = (50 % of 100 + 50% of 20) – 50 = 10 crores.
Answer 2 : (E)
Required profit = (30% of 100 + 70% of 20) – (50 + 10) = –16 crores.
Answer 3 : (E)
The correct answer is not present among the options.
The success rate of a product if its results are favorable = 80%
Total cost = 50 + 10 = 60 crores
Sales = 80% of 100 + 20 % of 20 = 84 crore
Hence, the profit = 84 – 60 = 24 crores.
Answer 4 : (B)
Required probability = 0.70 × 0.20 + 0.30 × 0.70 = 0.14 + 0.21 =0.35.
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