Question

Value chain and classification of costs, pharmaceutical company. Pfizer, a pharmaceutical company,incurs the following costs:

a. Payment of booth registration fee at a medical conference to promote new products to physicians
b. Cost of redesigning an insulin syringe to make it less painful
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of drugs,and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the government
e. Sponsorship of a professional golfer
f. Labor costs of workers in the packaging area of a production facility
g. Bonus paid to a salesperson for exceeding a monthly sales quota
h. Cost of FedEx courier service to deliver drugs to hospitals
Classify each of the cost items (a-h) as one of the business functions of the value chain.

Answer 1

See below.

Step-by-step explanation:

(A) Marketing cost

The function or purpose of this cost is to enable the marketing of Pfizer's new products to a target market.

(B) Research and Development cost

Innovation! The function of this cost is to improve the effect of a Pfizer product, hence it falls under research and development costs.

(C) Customer Service cost

For the line to be toll-free (for customers), the company has to bear a cost. This toll-free line is a customer service cost.

(D) Manufacturing cost

If the drugs are yet to be approved by the government, it means they've not been put out for approval or for sales. This makes them to still be in the manufacturing stages or process, hence an equipment purchased to conduct experiments on them is a manufacturing equipment. The cost of such equipment is a manufacturing cost.

(E) Marketing cost or Administrative cost

If the professional golfer is an employee or member of staff at Pfizer, then this is an administrative cost. If the professional golfer is just a random professional golfer (not working for Pfizer) then Pfizer is sponsoring him/her for publicity sake. This will make the sponsorship a marketing cost.

(F) Production cost

Labor is one of the factors of production in Economics. In this case, the laborers or workers are those who work in a production facility (not delivery or any other facility). Resources spent on these laborers will fall under production costs.

(G) Selling cost

The salesperson exceeded a monthly sales quota, fine! This increases Pfizer's revenue for that month; an addition to the company's accounts. To encourage the salesperson, Pfizer spends (a subtraction from the company's accounts) on him/her by paying extra. This payment is a selling cost.

(H) Distribution cost

Cost of distribution of goods, and you know that the whole production process isn't complete until goods get to the final consumers. So delivery or distribution is a part of the value chain.