You're BioMed's resident economic expert. Harry the CEO is asking you to complete a time-sensitive project that another person, Selwyn, had started working on before he retired.
Harry explains that BioMed has a manufacturing plant that produces a prescription topical cream called DermaPlus, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus.
A number of other firms produce creams that are almost identical to DermaPlus and the market for these creams is extremely competitive. In fact, BioMed's current share of the market for this type of topical cream is small, so it has no ability to influence the market price. On the other hand, because Biomed is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price.
The plant producing DermaPlus has been operating for a little over three years with the same manufacturing equipment. Currently there are no plans for upgrading or adding to this equipment.
Over the last three years, the price of DermaPlus and related creams has been quite volatile and BioMed has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, BioMed has been able to vary monthly production quite easily by taking advantage of a flexible, non-union workforce with a large number of part-time workers. However, the workforce at the DermaPlus plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus.
Before he left, Selwyn had been asked to estimate the short-run cost functions for the DermaPlus manufacturing plant. The goal was to use this information to determine the profit-maximizing output level and use that information to estimate the optimal size for the new unionized workforce. Harry tells you that DermaPlus and related products are just about to come under the umbrella of a new reference-based pricing scheme. Under the new scheme, the government will set the price of DermaPlus and competing creams, and review that price every two years. Once the price has been set, BioMed and other manufacturers simply have to decide how much of the cream, if any, they want to produce and sell.
Unfortunately, although the workforce will be unionized in just over a week, the referenced-based price for DermaPlus will not be announced for another two months. Consequently, BioMed has to choose the size of its workforce (and therefore its production capacity) before it knows the price it will get for its product. To reduce the uncertainty about this decision, Harry recently hired a consultant with expertise in the pharmaceutical industry and reference-based pricing to estimate the price that will be announced for DermaPlus . The consultant estimates that there is a 5% chance that the price will be $50 per unit, a 20% chance that the price will be $100 per unit, and a 75% chance that the price will be $150 per unit. This is the best estimate the consultant can provide given the lack of information coming from the government about the issue. After giving you this background information, Harry asks you to complete the following tasks:
1. Determine the profit-maximizing average daily production capacity for DermaPlus for each of the possible reference-based prices identified by the consultant. Estimate the expected daily profit in each case.
2. Recommend an average daily production capacity for the next 12 months given the uncertainty about the price of DermaPlus . Your recommendation will be used to set the size of the manufacturing plant's unionized workforce. (Note: You simply have to determine the best daily production capacity for the next 12 months, not the number of workers required.)
3. Write a short report summarizing the results of your analysis and any recommendations. You only have a week to complete the analysis, interpret the results, and summarize your findings and recommendations in a brief report. When Harry makes his recommendations about the structure and format of the report you realize that they are much the same for Assignment 1 that you completed at another company.
Finally, Harry gives you a copy of one of Selwyn's spreadsheets. This one contains data that Selwyn collected on the variables he thought would be needed to estimate the short-run cost functions for DermaPlus and the firm's profit-maximizing output level.
Harry makes it clear that he has complete confidence in Selwyn's technical abilities and professional judgment and tells you to take the information in Selwyn's spreadsheet at face value and to use it as a starting point for your analysis.
Notes
· Assumptions and Scope
If something in the assignment is unclear or contradictory, state your interpretation as an assumption. Remember that you may be challenged on your assumptions. Scope provides the focus of the analysis and is likely to be well defined by the assignment. If not, state what is outside of the scope of your analysis. Assumptions and scope statements should be necessary, realistic, consistent with the information in the assignment, and their significance made clear.
· Major Issues
These are what you are going to address in your analysis and recommendations. Clearly identify what you regard as the major issues and why you think they are important. Some major issues may be clear from the assignment and associated questions. However, do not assume that all, or even the most important, issues have been identified in the assignment questions. State each issue succinctly.
· Analysis
Rigorously analyze the issues you have identified. Base your arguments on data in the case. Demonstrate your critical thinking ability, creativity, and insight, as well as appropriate use of the tools provided in the text or in previous courses. Every issue you identify should be carefully explored in light of the available qualitative and quantitative data. Label opinion as such. There is no need to reproduce case data, simply incorporate it by reference. The analysis is likely to be the major portion of your paper, so logical ordering and clarity is important. Make the rigor of your thinking evident without overwhelming your reader. Your analysis must support your conclusions and recommendations.
· Conclusions
Attachment:- MEQA.xls