Prima innovations (Pty) Ltd has a new product called Duel that their design team have recently developed after spending the past two years on research and development. After that long battle, the company now faces two courses of action, that is, to test the market for Duel, or abandon it. It will cost them N$100 000 to test the market for the product, and the market response could be positive or negative, with probabilities of sixty percent and forty percent respectively. If the response is positive, the company could either abandon the product, or continue to market it. If the company goes ahead with the market launch, the demand might be low or high, with probabilities of sixty percent and forty percent respectively, and the net gain for the low demand would be N$100 000, or N$750 000 for a high demand. If the result of the test marketing is negative and the company goes ahead and markets the product the estimated losses would be N$600 000. The company may at any point in time abandon the product, and there would be a net gain of N$50 000 from the auction crap.
Required
a) Advise the company as to the best possible course of action by using a decision tree. [15]
b) Explain what a transfer price is and also discuss the three different methods of determining transfer prices. [7] c) What is meant by the term “decentralisation”?
