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DermaPlusTM’s Average Monthly Production Capacity

Harry the CEO has asked you to do another time-sensitive project since he was satisfied with your past work predicting and interpreting the demand function for QuickKitsTM.

 

Harry adds that BioMed has a manufacturing facility that creates a topical prescription medication called DermaPlusTM that is utilized to treat particular skin disorders.

DermaPlusTM is primarily purchased by hospitals and pharmacies.

 

The market for creams that are almost comparable to DermaPlusTM is quite competitive and is produced by a number of different companies. Since BioMed now holds a small portion of the market for this particular sort of topical cream, it is powerless to affect the pricing.

However, because Biomed is a little company in relation to the size of the market, it is free to sell as much cream as it wants at the going rate.

 

The same manufacturing machinery has been used by the DermaPlusTM production facility for a little over three years.

There are no current plans to update or expand this equipment.

 

The price of DermaPlusTM and similar creams has been highly unstable over the past three years, and BioMed has attempted to respond to the fluctuating pricing by altering its output level in order to consistently optimize its monthly profit.

By utilizing a flexible, non-union workforce with a sizable number of part-time employees, BioMed has so far been able to adjust monthly production relatively readily.

However, the DermaPlusTM plant’s workers is about to become unionized. Once that occurs, it will be much harder to alter the quantity of labor required immediately, which will make altering the monthly production of DermaPlusTM much harder.

An ex-employee was tasked with estimating the short-run cost functions for the DermaPlusTM manufacturing facility (data was gathered on the variables he believed would be required to calculate the short-run cost functions for DermaPlusTM and the company’s profit-maximizing output level and provided on the data spreadsheet attached).

The intention was to utilize this data to calculate the output level that would maximize profits and then use that data to calculate the ideal workforce size for the newly unionized workforce.

 

Harry informs you that a new reference-based pricing structure will soon include DermaPlusTM and connected items.

The price of DermaPlusTM and rival creams will be established by the government under the new plan, and it will be reviewed every two years.

Once the price has been established, BioMed and other producers need only choose how much, if any, cream they wish to make and sell.

 

Unfortunately, even though the employees will become unionized in less than a week, DermaPlusTM’s reference-based price won’t be disclosed for another two months.

Therefore, before knowing the price it would receive for its product, BioMed must decide the size of its workforce (and consequently its production capacity).

Harry just recruited a consultant with experience in the pharmaceutical sector and reference-based pricing to make an estimate of the price that will be disclosed for DermaPlusTM in order to lessen the confusion around this choice.

  1. Find DermaPlusTM’s average monthly production capacity that maximizes profits for each of the consultant’s potential reference-based pricing. Calculate the anticipated monthly profit for each scenario.

 

  1. Considering the ambiguity around DermaPlusTM’s price, suggest an average daily manufacturing capacity for the ensuing 12 months. The number of unionized workers at the manufacturing site will be determined using your suggestion. (Note: You don’t need to figure out how many people are needed; you just need to figure out the optimal daily production capacity for the upcoming 12 months.)

 

  1. Summarize the findings of your investigation and any recommendations in a brief report.

Last Updated on September 26, 2022

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