Question

Your company has invested $4 million in developing a new product but the development is not quite finished. In today’s meeting, your salespeople report that the recent introduction of competing products in the market has reduced the expected profits of launching your new product from $10 million to $3 million only. The Research Department reports that it will cost another $1 million to finish the development of this new product. Refer to the case above. Explain whether the following sentences are true or false.

I. At this stage, the opportunity cost of finishing the new product development is $5 million.

II. Your company should not go ahead to finish the product development and launch the new product.

Answer 1

1. True. At this stage, the opportunity cost of finishing the new product is $5 million as already $4 million has been invested and the development is not yet finished completely. Also, another $1million is required to finish the development of this product completely as told by the research department.

2. False. The company should go ahead with the complete development of the product and launch the same in the market as an investment of 4 million has been done already. The $ 4 million is the sunk cost that the company has incurred and if the company plans to drop the plan mid way it will result in the company loosing the entire amount that it has invested in the development of the new product.