Stop Them Limited (STL) is a company that manufactures mosquito repellents. Over the years STL has been producing one of the famous mosquito repellent called ‘Refrain’ under a patent. The company’s patent has now expired and as a result many competitors have already started manufacturing a similar product to Refrain using the same ingredients as well. Due to increase competition, STL is reviewing its pricing policy in order for it to remain competitive. A research conducted in line with the proposed new pricing policy reviewed that for every N$ 2 decrease in price, demand would be expected to increase by 5 000 batches, with maximum demand for Refrain being one million batches. Each batch of Refrain is currently made using the following materials:
20 minutes of machine time are required to manufacture each batch of Refrain and the variable running costs for machine time are NS6 per hour. The fixed production overhead cost is expected to be NS2 per batch for the period, based on a normal budgeted production level of 250 000 batches.
The employees possessing the skill to make Refrain have since been moved to an anti-malaria drug
project being developed by the Pharmaceutical wing of STL. Since this development is a million dollar project, STL has already obtained a patent for this revolutionary drug which is expected to save millions of lives. Currently, there is no other similar drug in the market. Even though the demand of this drug is not yet known there is great anticipation that it will receive favourable demand worldwide
The company has since hired new staff who have never worked with Refrain before and will be paid $18 per hour. These staff will produce Refrain into the foreseeable future. Experience has shown there will be a significant learning curve involved in making Refrain as it is extremely difficult to handle. The first batch of Refrain using the new staff took 5 hours to make. However,it is believed that an 80% learning curve exists, in relation to production of the repellent, and this will continue until the first 1 000 batches have been completed. STL management has said that any pricing decisions about Refrain should be based on the time it takes to make the 1 000th batch of the repellent.
a) Calculate the optimum (profit-maximising) selling price for Refrain and the resulting annual profit which STL will make from charging this price.
Note: If P=a—bQ, then MR=a-—2bQ
B) Discuss and recommend whether market penetration or market skimming would be the most suitable pricing strategy for STL when launching the new anti-malaria drug
Total marks 20
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