Question

Use the scenario below to answer the following question:

Southeastern Pharmaceuticals makes a number of generic versions of drugs. When Cymbalta (Duloxetine) lost its patent, Southeastern 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. Southeastern 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 Southeastern discontinue selling this product?

Answer 1

The breakeven price is $0.52 per tablet. Southeastern Pharmaceuticals should discontinue selling this product.

Step-by-step explanation:

In order to determine the breakeven price, we need to calculate the total cost and divide it by the forecasted sales volume. The total cost includes the investment to obtain FDA approval and certify the production line, as well as the production cost for each tablet. In this scenario, the total cost is $500,000 + $100,000 + $2,000,000 = $2,600,000. The breakeven price is calculated by dividing the total cost by the forecasted sales volume of 5 million tablets: $2,600,000 / 5,000,000 = $0.52 per tablet.

Based on the information provided, the selling price per tablet is $0.40. Since the breakeven price is higher than the selling price, Southeastern Pharmaceuticals is currently selling the product at a loss. In this case, Southeastern should discontinue selling this product as it is not profitable at the current selling price.