Reference no: EM13877560
Life-Cycle Costing, Health Care, Present Values Cure-all, Inc., has developed a drug that will diminish the effects of aging. Cure-all has spent $1,000,000 on research and development and $2,108,000 for clinical trials. Once the drug is approved by the FDA, which is imminent, it will have a five-year sales life cycle. Laura Russell, Cure-all's chief financial officer, must deter- mine the best alternative for the company among three options. The company can choose to manufacture, package, and distribute the drug; outsource only the manufacturing; or sell the drug's patent. Laura has compiled the following annual cost information for this drug if the company were to manufacture it:
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Cost Category
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Fixed Costs
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Variable Cost per Unit
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Manufacturing
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$5,000,000
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$68.00
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Packaging
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380,000
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20.00
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Distribution
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1,125,000
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6.50
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Advertising
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2,280,000
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12.00
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Management anticipates a high demand for the drug and has benchmarked $235 per unit as a reasonable price based on other drugs that promise similar results. Management expects sales volume of 3,000,000 units over five years and uses a discount rate of 10 percent.
If Cure-all chooses to outsource the manufacturing of the drug while continuing to package, distribute, and advertise it, the manufacturing costs would result in fixed costs of $1,500,000 and variable cost per unit of $80. For the sale of the patent, Cure-all would receive $300,000,000 now and $25,000,000 at the end of every year for the next five years.
Required: Determine the best option for Cure-all. Support your answer.
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: For the sale of the patent, Cure-all would receive $300,000,000 now and $25,000,000 at the end of every year for the next five years. Determine the best option for Cure-all Inc.
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