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Break-Even Analysis: Insulin - Costs and Revenue for Two Types of Insulin
Take a look at the information below. What is the problem facing the company and what should it do about it?
Insulin is a drug that is needed by people who suffer from diabetes. With regular intakes of this drug their health is kept stable and they are able to get on with their everyday lives.
A company is producing two types of insulin. At the moment it is selling 20 units of animal insulin at a price of 20 and 80 units of 'human' insulin at a price of 25.
Animal insulin
- Cost per unit = 12
- Price = 20
| Output | FC | VC | TC | TR | Profit |
|---|
| 0 | 350 | 0 | 350 | 0 | -350 |
| 10 | 350 | 120 | 470 | 200 | -270 |
| 20 | 350 | 240 | 590 | 400 | -190 |
| 30 | 350 | 360 | 710 | 600 | -110 |
| 40 | 350 | 480 | 830 | 800 | -30 |
| 50 | 350 | 600 | 950 | 1,000 | 50 |
| 60 | 350 | 720 | 1,070 | 1,200 | 130 |
| 70 | 350 | 840 | 1,190 | 1,400 | 210 |
| 80 | 350 | 960 | 1,310 | 1,600 | 290 |
| 90 | 350 | 1,080 | 1,430 | 1,800 | 370 |
| 100 | 350 | 1,200 | 1,550 | 2,000 | 450 |
'Human' or genetically modified insulin
- Cost per unit = 7
- Price = 25
| Output | FC | VC | TC | TR | Profit |
|---|
| 0 | 440 | 0 | 440 | 0 | -440 |
| 10 | 440 | 70 | 510 | 250 | -260 |
| 20 | 440 | 140 | 580 | 500 | -80 |
| 30 | 440 | 210 | 650 | 750 | 100 |
| 40 | 440 | 280 | 720 | 1,000 | 280 |
| 50 | 440 | 350 | 790 | 1,250 | 460 |
| 60 | 440 | 420 | 860 | 1,500 | 640 |
| 70 | 440 | 490 | 930 | 1,750 | 820 |
| 80 | 440 | 560 | 1,000 | 2,000 | 1,000 |
| 90 | 440 | 630 | 1,070 | 2,250 | 1,180 |
| 100 | 440 | 700 | 1,140 | 2,500 | 1,360 |
Key
- Cost per unit: The additional cost of making each extra unit of the product
- Output: The number of items produced
- Price: The price charged to customers
- TC: Total Cost - The fixed cost plus the variable cost for that output
- FC: Fixed Cost - the cost (e.g. interest paid on loans) that will have to be paid even if nothing is made
- TR: Total Revenue - The amount of money the company will get from sales: the price times the output
- VC: Variable Cost - The cost per unit times the number produced
What do you think the company should do? Should they increase the price of animal insulin? Stop production of animal insulin? Decrease the price of human insulin? Increase production of animal insulin? Or maybe you have another idea. Choose your preferred strategy.
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