Question

The company that you manage has already invested $16 million in developing a new product, but the development is not quite finished. As a result, it is not yet possible to sell any of this product. At a recent meeting, your salespeople report that the introduction of a competing product has reduced the expected sales of your new product to $14 million from an earlier estimate of $22 million It would cost an additional $10 million in order to finish development of this product and make it saleable. Should you go ahead and incur this cost? EXPLAIN using MARGINAL ANALYSIS

Answer 1

Whether we can go for a project or not can be decided using cost-benefit analysis and marginal analysis. In the given situation

expected sales dropped from $ 22 million to $ 14 million

cost already incurred in development of product already is $ 16 million

additional cost to be incurred would be $ 10 million

total cost attributable to the project would be $ 26 million

whereas the probable revenue would be $ 14 million

by going ahead with the project would cause a loss of $ 12 million( 26 - 14)

keeping other factors apart from above constant we shouldn't go for the project as it would lead to huge loss.