PharmaSolutions, an up and coming pharmaceutical company, produces NaturalRelief. NaturalRelief is
an all-natural, mild pain reliever. The MSRP is $14.04 for a pack of 250 tablets. The retail margin is 30%
of selling price. It costs PharmaSolutions a $1.50 per bottle for ingredients and $0.50 for packaging. Sales
for NaturalRelief were 900,000 units in the year that just ended and are projected to remain the same.
Each product at PharmaSolutions is operated as an independent business unit. General and
administrative expenses for NaturalRelief total $1,500,000. Advertising for NaturalRelief is budgeted at
$1,500,000 for the upcoming year.
To help offset any sales that NaturalRelief might lose from new products entering the market,
PharmaSolutions is considering changes to its salesforce compensation system. One plan is to increase
salaries for NaturalRelief sales representatives. There are currently 50 sales representatives for
NaturalRelief with salaries totaling $6,000,000. Under the plan each would receive a raise of $20,000 a
year. A second plan is to begin offering salespeople a 5% commission on the sales of NaturalRelief. They
do not currently earn any commission. There is also a plan under consideration to cut the MSRP of
NaturalRelief by 15%.
PharmaSolutions is in the process of launching VitaLean, a combination weight loss aid and vitamin
supplement. The product is used throughout the country by medical facilities specializing in weight loss.
The product is sold to those facilities at $15 a package. The weight loss clinics in turn charge their
patients $30 per package. The fixed manufacturing and marketing cost associated with VitaLean total
$245,000. It costs PharmaSolutions $0.50 per package for manufacturing and packaging, and another
$0.50 per package for shipping.
Nationwide, there are approximately 2,000 weight loss clinics, three-quarters of which dispense weight
loss pills and vitamins. Those clinics are comprised of 10% large institutions; the remaining facilities are
small. Large facilities typically place three orders per year, each for 75 units, and the smaller practices
demand an average of 10 units, twice per year. PharmaSolutions plans to limit its marketing to large
facilities. Retail sales of weight loss vitamin pills in large weight loss clinics total $35,000,000 per year.
The scientists at PharmaSolutions have had a major breakthrough in painkillers and hope to replace the
frequent use of prescription headache pills by patients with severe recurring headaches with an injectable
medication. Currently, the average target patient suffering from severe recurring headaches spends $50
for a yearly doctor’s office visit to get a prescription for a long-acting pain pills. That prescription pain
reliever costs about $40 a month. Patients also spend around $5 a month for other OTC medicines to
curb side effects of the prescription medication.
PharmaSolutions offers Qutoxiline that guarantees no headaches for three months with a single injection.
PharmaSolutions plans on making the medication available at an MSRP of $35 per injection. Doctors who
administer the injections expect to get a 40% markup over cost on Qutoxiline. In addition to the cost of the
injection, the patient will have to pay $70 to for a doctor’s office visit and required blood tests at the time
of each injection. Patients will also have to pay about $15 a month in other medicines to curb side effects.
Questions: Please show all work
1. Ignoring the effects of any new product being launched, what is the projected gross profit margin
in dollars for NaturalRelief for the upcoming year if the price change is not put into effect?
2. Of the new pain relief tablets introduced to the market, which one are retailers more likely to
3. What is the trade margin of Gelrelief for retailers when it is calculated as a percentage?
4. What is the total breakeven volume in dollars for Easeaway?
5. Assuming no change in salaried and no sales commission, how much will sales of NaturalRelief
have to increase in units in order to cover the decrease in price?
6. Assuming no change in price and no sales commission, how much will sales of NaturalRelief
have to increase in units ti cover the increase in sales person salaries?
7. Assuming no change in price and no change in sales salries, how much will sales of NaturalRelief
have to increase in units in order to cover the cost of the sales commission?
8. Assuming price doesn’r change, how much will sales of NaturalRelief have to increase in order to
cover the cost of the increase in sales salaries and the sales commission?
9. What is the breakeven cannibalization rate for Easeaway?
10. How many units of Easeaway must be sold for each NaturalRelief that is cannibalized by the sale
11. What is the segment value of weight loss vitamin pills in large facilities for Vitalean?
12. What is the trade margin of Vitalean for weight loss centers when it is calculated as a markup
13. What is the revenue breakeven market share for Vitalean?
14. How much will the introduction of Easeaway change PharmaSolutions total contribution?
15. What is the EVC of Qutoxilline for a single patient for 1 year?
16. What does the EVC of Qutoxilline suggest about the planned price of the product Explain your
17. What price will PharmaSolutions have to charge doctors for Qutoxilline so that the doctors receive
their expected margin and patients pay the MRSP?
18. Ignoring the effects of any new products being launched, prepare a pro forma income statement
for NaturalRelief. Assume that the plans for increases in sales, salaries and the addition of slaes
commissions are both implemented but the price change is not. Marketing expenses represent
what percentage of sales for NaturalRelief?
19. Ignoring the effects of any new products being launched, prepare a pro forma income statement
for Naturalrelief. Assume that the plans for increases in sales, salaries and the addition of slaes
commissions are both implemented but the price change is not. What is the projected net income
20. Assume that the plans for increases in sales, salries and the addition of sales commissions are
both implemented for NaturalRelief sales force but the price change is not. What is the
contribution margin percentage NaturalRelief?
PharmaSolutions has just completed pushing a second pain relief tablet through the FDA and is thinking
of introducing that new product as EaseAway. Its MSRP is set to be $10 dollars for a bottle of 250 caplets.
The retail margin is 30% of price. It will cost PharmaSolutions $1 a bottle for the key ingredient (aspirin),
another $0.50 a bottle for the advanced easy swallow coating, and another $0.50 for packaging.
In addition to this, PharmaSolutions has had several other major expenditures on EaseAway. They have
already spent $750,000 on R&D on various legal fees developing the product. Going forward, these
expenses will be reduced to a total of $100,000 per year. Their other fixed costs will be extra $1,100,000
plus marketing costs. For the first year, PharmaSolutions plans to spend $2,000,000 on TV advertising
and $500,000 on several newspaper ads. EaseAway will have its own salesforce with expenses
estimated to be $300,000.
PharmaSolutions expects to sell 250,000 units of EaseAway Of that amount, 100,000 units will be
diverted from NaturalRelief. EaseAway is not expected to impact the sales of any other PharmaSolutions
Coincidentally, another drug company, AdvancedPharm, is unveiling a pain reliever similar to EaseAway. That
product, GelRelief, will come in the form of a gel coated tablet. Its average retail price is set to be 10% less than the
average retail price of EaseAway for the same quantity. The retailers’ margin is $3.25. It will cost AdvancedPharm
$1.50 a bottle for the main ingredient (Papavera somniferum), $0.75 a bottle for gel coating the tablets, and
another $0.60 for packaging.