solution

The Trumbull Company has developed a new product. Trumbull’s chairperson

estimates that the new product will increase the firm’s revenues by $5 million

per year, and that it will result in extra out- of- pocket costs of $4 million per

year, the fully allocated costs (including a percentage of overhead, depreciation,

and insurance) being $5.5 million.

a. Trumbull’s chairperson feels that it would not be profitable to introduce

this new product. Is the chairperson right? Why or why not?

b. Trumbull’s vice president for research argues that since the development

of this product has already cost about $10 million, the firm has little

choice but to introduce it. Is the vice president right? Why or why not?