A leading multinational firm operating within the medical industry is completing

Question

A leading multinational firm operating within the medical industry is completing the development of adhesive drapes used primarily for pediatric burn victims. These surgical drapes reduce patient infections, are easy to use, and provide affordability and access within even the lowest of GDP emerging markets.

Currently, the only existing drapes cost the hospital $200 per set and can only be used for one procedure. It is estimated that this new product innovation will cost the hospital $10 per unit and the manufacturer will have a 20% variable cost. All products are shipped directly from the firm to the hospitals. Shipping and handling is factored into this cost-structure. Overall fixed costs are estimated at $3 million.

Miraculously, these new drapes will reduce the current infection rate of 9% by 66.67%. It is estimated that with the older drapes 20% of all such infections led to morbidity.

Based upon market analysis, it is estimated that the new product market share will be 66.67% of 30 million procedures annually. Currently, the market for drapes is segmented based upon type of application (e.g., burns, blunt injuries, and birthing), age of the patient, income/ability to pay, gender, and country of the hospital. Purchasing decisions are made by hospital buyers who are influenced by trained medical staff.

Question: Determine the variable cost this leading multinational firm occurs when producing each drape, and how many units (and dollars worth) of drapes must this firm sell in order to obtain a $1 billion profit when each drape is sold to the hospital at $10.

Explanation / Answer

Variable cost is 20% of $10 = $2

Contribution margin/drape = $10-$2=$8

Fixed cost = $3 million

Profit required = $1 billion

Total = FC+Profit required = 1003000000

Number of units required = $1003000000/$8=125375000 units = 125.375 million units

Sale value = Number of units*$10 = 125.375 million*10=$1.25375 billion

Please share feedback

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.