Question
In: Accounting
For a single dose of a treatment a company has these costs: $100 of raw materials,...
For a single dose of a treatment a company has these costs:
$100 of raw materials, $25 shipping, $25 proper storage containers. The company has invested $300 million in R&D.
4 doses of treatments are required per year per patient. On average, the company requires margins of 50% for their treatment.
1) What is the lowest price point the company will accept per patient for a complete year of treatment? What approach you are using?
2) What is the highest price you could charge (i.e. price ceiling) per patient for the treatment duration of one year? What approach you are using?
Solutions
Expert Solution
1.
Total cost of a single dose = $100 of raw materials+ $25 shipping+$25 proper storage containers = $150
No. of doses required per year = 4
Total cost for a complete year of payment = $150*4 = $600
Hence, the lowest price that the company will accept for a complete year of treatment is $600 [being the price at which it is atleast recovering its avoidable cost]
The company has already invested $300 million in R&D. Essentially it is a sunk cost and should not be considered in decison making. This approach is called the relevant costing approach whereby only those costs are considered for decision making which will be affected by that decision.
2.
Since the company requires margin of 50% for the treatment hence the highest price that it will charge = 600 + 50% of 600 i.e. $900 per patient per year.
Similar to the concept used above, we are using relevant cost technique for determing the highest price.
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