Imagine that you manage a company that has invested $5 million in developing a new product, but has not completed development. At the last meeting, your salespeople report that the arrival of new competing products has reduced expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you do so? What is the most you should pay to complete development? Why? Be sure to explain.

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To determine whether it is worthwhile to complete the development of the new product, you need to compare the potential revenue with the cost of completion.

Here's the step-by-step explanation of how to approach this decision:

1. Calculate the potential profit: Subtract the cost of completion from the expected sales to determine the potential profit. In this case, the potential profit would be $3 million (expected sales) - $1 million (completion cost) = $2 million.

2. Evaluate the return on investment (ROI): To assess the return on investment, divide the potential profit by the cost of completion. In this case, the ROI would be $2 million (potential profit) / $1 million (completion cost) = 2.

3. Compare the ROI with alternative investments: Consider the potential ROI of alternative investments or opportunities to determine if completing the product is a better use of resources. If alternative options offer a higher ROI, it may be more prudent to invest elsewhere.

However, the question also asks what is the maximum amount you should pay to complete development. To determine the maximum amount, you need to assess the potential profitability.

If the expected sales are now $3 million and it costs $1 million to complete development and produce the product, the potential profit is $2 million ($3 million - $1 million). Therefore, the maximum amount you should pay to complete development is $2 million, as paying more than that would result in a potential profit lower than $2 million or possibly incurring a loss.

In summary, the decision to complete development should be based on the potential profitability and return on investment. If the potential profit and ROI justify the investment, completing the development would be beneficial. However, if alternative investments offer a higher ROI, it might be more sensible to allocate resources there. The maximum amount you should pay to complete development should not exceed the potential profit from the expected sales, which in this case is $2 million.