Question

Prescott Pharmaceuticals makes a number of generic versions of drugs. When Cymbalta (Duloxetine) lost its patent, Prescott invested $500,000 to obtain FDA approval and $100,000 to certify one of its production lines for its production. Production of the drug will cost $2,000,000. Marginal costs for the tablet are $0.10 and they sell for $0.40 per tablet. But many firms have entered and now make Duloxetine causing sales to fall off. Prescott anticipates that it could use this production line for other drugs losing patent protection shortly. If forecasted sales are 5 million tablets, what is the breakeven price? Should Prescott discontinue selling this product?

Answer 1

Answer:

Prescott discontinue selling this product

Explanation:

Production cost per tablet = $2,000,00 / 5,000,000 = $0.40

Marginal costs per tablet = $0.10

Total avoidable cost per tablet = $0.40 + $0.10 = $0.50  

Since the total avoidable cost per tablet of $0.50 is higher than the selling price of $0.40 per tablet, Prescott discontinue selling t.his product

Note that $500,000 to obtain FDA approval and $100,000 to certify one of production lines for its production are sunk costs which are not avoidable. They are therefore not considered in the decision making.