Optimal Pricing Policy and Breakeven Analysis

Case Study 1: Prescott Pharmaceuticals

Prescott Pharmaceuticals manufactures generic drugs. With loss of patent right of Cymbalta, which is also known as Duloxetine, Prescott Pharmaceuticals invested in certification and FDA approval. The investment made for FDA approval is $ 500, 000 and the cost of certification for production lines is $ 100, 000. It evident from the given information that $ 2, 000, 000 is the cost of production. It is given that the marginal cost for each table is $ 0.10. Due to loss of patent right new firms have entered the market and thus it is estimated that the sales of Prescott will fall. The forecasted sales of Prescott is 5 million tablets. The selling price per tablet is $ 0.40. The company should at least breakeven to recover its cost per unit. Breakeven can be given as The cost of FDA approval and certification are sunk costs and hence they are not included in the calculation of breakeven price (Clark & Wrigley, 2017). The breakeven price is $ 0.41 per unit.

The breakeven price per unit is higher than the per unit selling price of the generic drug by $ 0.01 per unit (Kampf, Majerčák & Švagr, 2016). Therefore, by continuing selling of the drug the Prescott would make loss. Hence, Prescott should discontinue selling of the product.

ShorTech after introduction of its Quadrant mobile phone and priced it at $ 500 per unit. It is given that $ 350 is cost of production per unit. As per the hired economic consultant, ShorTech is charging the optimal price (Güler, Akan & Sevim, 2017). However, after the entry of new mobile phone manufacturing companies in the industry customers became more conscious as per the economics consultant the ShorTech should the charge new price to compete the in the market. The cost of per unit production of mobile phone has reduced to $ 300. The current price elasticity of the product is -4. Therefore new optimal price ShorTech should charge is Therefore, ShorTech should charge $ 400 per unit and is the current optimal price. Therefore, it can be seen that with entry of new firms in the market the optimal price of per unit of Quadrant mobile phone has reduced to $400 per unit.

References

Clark, G. L., & Wrigley, N. (2017). Sunk costs: a framework for economic geography. In Economy (pp. 241-260). Routledge.

Güler, M. G., Akan, M., & Sevim, Ä°. (2017). Optimal pricing policy with inventory related costs and reference effects.

Kampf, R., Majerčák, P., & Švagr, P. (2016). Application of break-even point analysis. NAŠE MORE: znanstveno-stručni časopis za more i pomorstvo, 63(3 Speci