Question: Analysis and Judgment. As part of your regular year-end audit of a public client, you must estimate the probability of success of its proposed new product line. The client has experienced financial difficulty during the last few years and, in your judgment, a successful introduction of the new product line is necessary for the client to remain a going concern. Five elements are necessary for the successful introduction of the product:
(1) successful labor negotiations before the strike deadline between the construction firms contracted to build the necessary addition to the present plant and the building trades unions,
(2) successful defense of patent rights,
(3) product approval by the Food and Drug Administration (FDA),
(4) successful negotiation of a long-term raw material contract with a foreign supplier, and
(5) successful conclusion of distribution contract talks with a large national retail distributor.
In view of the circumstances, you contact experts who have provided your public accounting firm with reliable estimates in the past. The labor relations expert estimates that there is an 80 percent chance of successfully concluding labor negotiations. Legal counsel advises that there is a 90 percent chance of successfully defending patent rights. The expert on FDA product approvals estimates a 95 percent chance of new product approval. The experts in the remaining two areas estimate the probability of successfully resolving (1) the raw materials contract and (2) the distribution contract talks to be 90 percent in each case. Assume that these estimates are reliable.
Required: What is your assessment of the probability of successful product introduction?