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R.R. Jha
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BioMed has a manufacturing plant that produces a prescription

Customer Question

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 disappeared, 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 profitmaximizing 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 referencedbased 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.)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.976634916
R Square 0.953815759
Adjusted R Square 0.951016714
Standard Error 2.903816767
Observations 36

ANOVA
df SS MS F Significance F
Regression 2 5746.759699 2873.37985(NNN) NNN-NNNN9.20763E-23
Residual 33(NNN) NNN-NNNN8.432151815
Total 35 6025.020709

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
82.14417653 4.13812573 19.85057533 6.43403E-20 73.72509648 90.56325659 73.72509648 90.5632 5659
-0.411966201 0.025553902 -16.12145957 3.29885E-17 -0.463956006 -0.359976396 -0.463956006 -0.359976396
0.000710782 3.67491E-05 19.34150824 1.41965E-19 0.000636016 0.000785549 0.000636016 0.000785549

Observation Month Output TVC TFC AVC Q Q2
(average units/day) (average $/day) (average $/day)
1 Jan-05 530 $31,450 $9,000 $59.34 NNN-NN-NNNN
2 Feb-05 325 $8,070 $9,000 $24.83 NNN-NN-NNNN
3 Mar-05 550 $38,380 $9,000 $69.78 NNN-NN-NNNN
4 Apr-05 320 $6,340 $9,000 $19.81 NNN-NN-NNNN Estimated equation:
5 May-05 220 $6,610 $9,000 $30.05 220 48400
6 Jun-05 205 $4,870 $9,000 $23
Submitted: 10 months ago.
Category: Business and Finance Homework
Expert:  R.R. Jha replied 10 months ago.
Hi,

Thanks for asking. Please send the original excel file. You may upload it at wikisend.com or mediafire.com and post download link here.

Expert:  R.R. Jha replied 10 months ago.
Please download answer below

https://app.box.com/s/quny3de2utxc9dtker0g

Please leave a rating.

Thanks
Expert:  R.R. Jha replied 10 months ago.
Hello Sue,

Could you retrieve the answer?
Customer: replied 10 months ago.


























































































































































































































































































































































































ObservationMonthOutputTVCTFCAVCQQ2
(average units/day)(average $/day)(average $/day)
1Jan-05530 $31,450 $9,000 $59.34530280900
2Feb-05325 $8,070 $9,000 $24.83325105625
3Mar-05550 $38,380 $9,000 $69.78550302500
4Apr-05320 $6,340 $9,000 $19.81320102400
5May-05220 $6,610 $9,000 $30.0522048400
6Jun-05205 $4,870 $9,000 $23.7620542025
7Jul-05255 $5,640 $9,000 $22.1225565025
8Aug-05370 $10,500 $9,000 $28.38370136900
9Sep-05480 $21,110 $9,000 $43.98480230400
10Oct-05175 $5,570 $9,000 $31.8317530625
11Nov-05325 $7,200 $9,000 $22.15325105625
12Dec-05160 $5,120 $9,000 $32.0016025600
13Jan-06445 $16,460 $9,000 $36.99445198025
14Feb-06220 $6,390 $9,000 $29.0522048400
15Mar-06170 $5,810 $9,000 $34.1817028900
16Apr-06280 $7,130 $9,000 $25.4628078400
17May-06225 $5,550 $9,000 $24.6722550625
18Jun-06410 $12,910 $9,000 $31.49410168100
19Jul-06315 $6,670 $9,000 $21.1731599225
20Aug-06430 $15,740 $9,000 $36.60430184900
21Sep-06155 $4,710 $9,000 $30.3915524025
22Oct-06320 $6,260 $9,000 $19.56320102400
23Nov-06285 $6,960 $9,000 $24.4228581225
24Dec-06535 $38,080 $9,000 $71.18535286225
25Jan-07390 $12,810 $9,000 $32.85390152100
26Feb-07350 $7,780 $9,000 $22.23350122500
27Mar-07165 $6,280 $9,000 $38.0616527225
28Apr-07295 $5,990 $9,000 $20.3129587025
29May-07370 $10,320 $9,000 $27.89370136900
30Jun-07310 $8,050 $9,000 $25.9731096100
31Jul-07385 $11,180 $9,000 $29.04385148225
32Aug-07505 $29,800 $9,000 $59.01505255025
33Sep-07310 $7,940 $9,000 $25.6131096100
34Oct-07445 $17,150 $9,000 $38.54445198025
35Nov-07420 $14,350 $9,000 $34.17420176400
36Dec-07450 $18,700 $9,000 $41.56450202500
Customer: replied 10 months ago.


















The monthly data for the Jan 2005 to Dec 2007 period, 36 data points in all, should be enough to obtain reasonable estimate of the short-run cost function for DermaPlus.
Between Jan 2005 and Dec 2007, the amount of capital equipment at the plant was constant, so all variation in output over that period was caused by changes in the amount of labour employed.
All costs have been converted from nominal dollars into real 2008 dollars using Canadian consumer price index using the standard method. If you're curious, see pp. 378-379 of Thomas and & Maurice (10th edition) for details of what I did.
Because DermaPlus™ has a short shelf life, BioMed cannot keep an inventory of the cream. Any DermaPlus™ that is produced and not sold will be wasted.
The regression component of Excel's Analysis ToolPak was be used to estimate the short-run average variable cost function.
Customer: replied 10 months ago.








































































































SUMMARY OUTPUT
Regression Statistics
Multiple R0.976634916
R Square0.953815759
Adjusted R Square0.951016714
Standard Error2.903816767
Observations36
ANOVA
dfSSMSFSignificance F
Regression25746.7596992873.37985340.76471979.20763E-23
Residual33278.26100998.432151815
Total356025.020709
CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%
82.144176534.1381257319.850575336.43403E-2073.7250964890.5632565973.7250964890.56325659
-0.4119662010.025553902-16.121459573.29885E-17-0.463956006-0.359976396-0.463956006-0.359976396
0.0007107823.67491E-0519.341508241.41965E-190.0006360160.0007855490.0006360160.000785549
Customer: replied 10 months ago.



































Notes on estimating short-run cost functions for DermaPlus
1:The monthly data for the Jan 2005 to Dec 2007 period, 36 data points in all, should be enough to obtain reasonable estimate of the short-run cost function for DermaPlus.
2:Between Jan 2005 and Dec 2007, the amount of capital equipment at the plant was constant, so all variation in output over that period was caused by changes in the amount of labour employed.
3:All costs have been converted from nominal dollars into real 2008 dollars using Canadian consumer price index using the standard method. If you're curious, see pp. 378-379 of Thomas and & Maurice (10th edition) for details of what I did.
4:Because DermaPlus™ has a short shelf life, BioMed cannot keep an inventory of the cream. Any DermaPlus™ that is produced and not sold will be wasted.
5:The regression component of Excel's Analysis ToolPak was be used to estimate the short-run average variable cost function.
Variable Definitions
TVC = Total variable costs (in real 2008 $ per unit)
TFC = Total fixed costs (in real 2008 $ per unit)
Expert:  R.R. Jha replied 10 months ago.
Hi Sue,

I already send you the answer document. You may download it below

https://app.box.com/s/quny3de2utxc9dtker0g

Thanks

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