Question

Exercises 6-21 Sales budget, healthcare. Coronavirus disease 2019 (COVID-19) was first identified in December 2019 and resulted in an ongoing pandemic. There are currently few effective treatments for coronavirus with doctors relying on patients’ immune systems. In 2020, a UK-based bio-tech company, Synergy, produced 12,200 A tests for £290 each and 16,400 B tests for £240 each. The firm expects B tests sales to decrease by 10% next year. However, research into the virus is expected increase A test sales by 6% each year in the future. Management at Synergy feels that if the price for B tests is lowered to £230 per test, the firm will see only a 7% decline in B test sales in 2021. 1. Prepare a 2021 sales budget for Synergy assuming it holds prices at 2020 levels. 2. Prepare a 2021 sales budget assuming Synergy lowers the price of B tests to £230. Should Synergy lower the price of B tests in 2021 if its goal is to maximize sales revenue

Answer 1

Certainly! Let's address each part of the exercise step by step:

A Tests:

Units: 12,200 * (1 + 0.06) = 12,932

Price: £290 per test

Total Revenue: 12,932 * £290 = £3,752,680

B Tests:

Units: 16,400 * (1 - 0.10) = 14,760

Price: £240 per test

Total Revenue: 14,760 * £240 = £3,542,400

Total Sales Revenue: £3,752,680 + £3,542,400 = £7,295,080

Part 2: 2021 Sales Budget (Lowering B Test Price to £230)

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A Tests:

Units: 12,200 * (1 + 0.06) = 12,932

Price: £290 per test

Total Revenue: 12,932 * £290 = £3,752,680

B Tests:

Units: 16,400 * (1 - 0.07) = 15,252

Price: £230 per test

Total Revenue: 15,252 * £230 = £3,510,360

Total Sales Revenue: £3,752,680 + £3,510,360 = £7,263,040

Analysis:

Comparing the two scenarios, if Synergy lowers the price of B tests to £230, the total sales revenue is slightly lower (£7,263,040) compared to holding prices at 2020 levels (£7,295,080). Therefore, if the goal is to maximize sales revenue, Synergy might consider keeping the B test price at £240.

It's important to note that this analysis is based solely on revenue considerations. Other factors such as market competition, profit margins, and overall business strategy should also be taken into account when making pricing decisions.