Kroft Food Products is attempting to decide whether it should introduce a new line of salad dressings called "Special Choices." The company can either test market the salad dressings in selected geographic areas or bypass the test market and introduce the product nationally.

The cost of the test market is $150,000. If the company conducts the test market, it must wait to see the results before deciding whether to introduce the salad dressings nationally. The probability of a positive test market result is estimated to be 0.6.

Alternatively, the company can decide not to conduct the test market and go ahead and make the decision to introduce the dressings or not. If the salad dressings are introduced nationally and are a success, the company estimates that it will realize an annual profit of $1.6 million, whereas if the dressings fail, it will incur a loss of $700,000. The company believes the probability of success for the salad dressings is 0.50 if they are introduced without the test market.

If the company conducts the test market and it is positive, then the probability of successfully introducing the salad dressings increases to 0.8. If the test market is negative and the company introduces the salad dressings anyway, the probability of success drops to 0.30.

To analyze the decision of introducing the new line of salad dressings, we can compare the expected values of the two options: conducting a test market or bypassing the test market and introducing the dressings nationally.

Option 1: Conducting a Test Market

Cost of test market: $150,000

Probability of a positive test market result: 0.6

Probability of a negative test market result: 0.4

If the test market is positive:

Probability of successful national introduction: 0.8

Annual profit if successful: $1.6 million

If the test market is negative:

Probability of successful national introduction: 0.3

Annual profit if successful: $1.6 million

Expected value of conducting the test market:

(Probability of a positive test market result * Probability of successful national introduction * Annual profit if successful) + (Probability of a negative test market result * Probability of successful national introduction * Annual profit if successful) - Cost of test market

Option 2: Bypassing the Test Market

Probability of successful national introduction without test market: 0.5

Probability of successful national introduction if test market is negative: 0.3

Annual profit if successful: $1.6 million

Expected value of bypassing the test market:

(Probability of successful national introduction without test market * Annual profit if successful) - (Probability of unsuccessful national introduction without test market * Loss if unsuccessful)

By comparing the expected values of the two options, the company can make a decision based on maximizing the expected profits.

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