Demand for a drug called Avonex has declined every year for the past 10. Not a p

Question

Demand for a drug called Avonex has declined every year for the past 10. Not a problem for its manufacturer, Biogen. U.S. revenue from the drug has more than doubled in that time, to $2 billion last year. The key: repeated price increases. It is an example of drug companies' unusual ability to boost prices beyond the inflation rate to drive their revenue, even when demand for the drugs doesn't cooperate. How could the manufacturers use cost-volume-profit analysis to improve profitability? In what ways might they have used the analysis tool to make decisions in the past? If Biogen raises prices in the face of decreased demand, how are the company's fixed costs impacted? What is the affect on variable costs? How do those factors ultimately affect net income?

Explanation / Answer

The Typical CVP analusis equation is :

Sales Revenue =( Units sold *Selling Price)

Less Variable costs =$

= Contribution Margin   

Less Fixed costs

= Net Operating Income.

The company knows its Fixed cost , Net Operating Income targeted. So it can calculate the targeted Contribution Margin as Fixed Cost+ Net Operating Margin Required.

The comany knows the variable costs and the estimated drugb sales volume .So it can calculate the unit selling price to get the required revenue and the required Contribution margin and can maintain the net operating income even when the demand is dwindling.

When Biogen increases prices , there is no change in Fixed expense. As the demand reduces , the total variable cost decreases , though the per unit variable cost remain the same.

When price is increased with decreasing demand, depending on the revised price the total contribution margin ( Sales Revenue less total variable cost) either remain same or increases. As the Fixed costs remains the same , the net Operating Income ( Contribution Margin less Fixed costs ) either remains same or increases.

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