Question

1. Kroft Food Products must decide whether to introduce a new line of salad dressings called Special Choices. The company can test market the salad dressing in selected geographic areas or bypass the test market and introduce the product nationally. The cost of the test market is $150,000. The probability of a positive test market is 0.6. If the test market is positive and they introduce the product nationally, the probability it will be a success nationally is 0.8. If the test market is negative, the probability it will be a success nationally is .1. If they introduce the product nationally without test marketing it at all, there is a 0.5 probability it will be a success nationally. If it is a success nationally, the net present value of the profits will be 1.6 million dollars. If it is not a success nationally, the net present value of the profits will be a 0.6 million dollar loss. Draw and solve a decision tree to determine what Kroft should do.

Answer 1

1.

The decision tree is as follows.

From the decision tree and calculated expected profit, we conclude that it is better to perform test of market before introducing the product nationally. If test of market shows positive market, it is better to decide in favour of introducing the product nationally. However, if test of market shows negative market, it is better to decide against of introducing the product nationally.