Question

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

Answer 1

Yes,I should go ahead and invest addition $1 million to help in developing and finishing the new product.

The reports by sale people about the reduction in expected sales to $ 3 million should not affect my decision making process. I have to recognize that $ 5 million is gone and compare the additional $ 1 million vs expected sales $ 3 million

I have to acknowledge that what matters ,in my case, is marginal profit not total profit. Therefore , by adding capital towards production of the commodity ,I'll make marginal profit of $ 2 million.