Question

A pharmaceutical company has determined that if a new cholesterol-reducing drug is manufactured (introduced to the market), the following probability distribution will describe the contribution of this drug to their profits during the next six months.

PROFIT CONTRIBUTION PROBABILITY OF PROFIT CONTRIBUTION
- $30,000 .20
$50,000 .50
$200,000 .30


The company management has decided to market this product if the expected contribution to profit for the next six months is more than $90,000. Based on the information given above, should the company begin manufacturing the new drug?
(A) Yes, begin manufacturing
(B) No, don't begin manufacturing

Answer 1

Expected contribution:

= -30,000 x 0.20 + $50,000 x 0.50 x $200,000 x 0.30

= $79,000

The company should not embark on the manufacturing of the new drug because the expected contribution is less than the target contribution of $90,000.

The correct answer is B

Step-by-step explanation:

The expected contribution is obtained my multiplying the contribution of each scenario by the probability. The company has decided that the company would only produce the new drug if the expected contribution is more than $90,000. Thus, we will concluded that the new drug should not be produced because the expected contribution is less than $90,000.