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Running Head: Problem Set # 2

Cathy started a custom wedding shoe business. After her first month, she spent $2,500 on licensing, $3,000 on materials, and made $3,500 in sales. Her sister said she was losing money and should close down. However, her revenue of $3,500 exceeds her total costs of $2,500 + $3,000. As an economist, I would advise her not to shut down since her business is currently profitable.

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61 views4 pages

Running Head: Problem Set # 2

Cathy started a custom wedding shoe business. After her first month, she spent $2,500 on licensing, $3,000 on materials, and made $3,500 in sales. Her sister said she was losing money and should close down. However, her revenue of $3,500 exceeds her total costs of $2,500 + $3,000. As an economist, I would advise her not to shut down since her business is currently profitable.

Uploaded by

aks
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Running head: Problem Set # 2


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Running head: Problem Set # 2
Cathy started her own line of custom made, hand embellished wedding shoes. She

opened up her own shop paid $2500 in fixed licensing fee. She used about $3000 in raw

materials and made $3500. At the end of the first month, Carly, her sister looked at her

financials and told her that she was losing money and should shut down. Cathy is

heartbroken. As an economics guru, what would you advise her to do?

Cathy deals in custom made embellished wedding shoes and as per the given scenarios her

Fixed or Sunk Cost = $2,500

Variable Cost = $3,000

Revenue = $500

Looking at the current numbers it is advised to Cathy to “NOT TO SHUT DOWN HER

BUSINESS”.

This is advised as her revenue is based on raw material – total earnings and that showed the

positive number.

The fixed or sunk cost are counted in the decision making as they are unavoidable even if the

production is stopped.

Cathy cannot get those $2,500 back. Therefore, it is suggested not to shut down.
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Running head: Problem Set # 2
2. Prescott Pharmaceuticals makes a number of generic versions of drugs. When

Cymbalta (Duloxetine) lost its patent, Prescott 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. Prescott 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 Prescott discontinue selling this product?

As per the given information

The FDA approved cost = $500,000

Certification cost = $100,000

Production cost= $2,000,000

Marginal/Variable cost per unit = $0.1

Selling price per unit = $0.4

Break even Point = fixed cost / selling price – variable price

= 5,000,000+100,000+2,000,000/0.4-0.1

=8,666,666 units

Now to calculate the selling price

(selling price x Number of units = Fixed cost + (Variable cost x Number of units)

Selling price x 5,000,000 = 2,600,000 +. (0.1 x 5,000,000)

Selling Price = $0.62


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Running head: Problem Set # 2
So the estimated breakeven price for 5,000,000 units will be $0.62

The analysis of the numbers calculated shows that the forecasted sales for the tablet is

5,000,000 units which will not get the company the desired breakeven point which is at

present 8,666,666 units. So it is suggested “NOT TO CONTINUE WITH THE DRUG”.

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