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Answer:

To determine if the company should make the product, calculate the expected value (EV). First, find the profit (P) if successful: $240,000 - $196,000 = $44,000. If unsuccessful, the company loses the development cost, resulting in -$196,000. Using the probabilities, EV = ($44,000 * 0.75) + (-$196,000 * 0.25). EV = $33,000 - $49,000 = -$16,000. Since the expected average profit is -$16,000, the company should not make the product.