Enzymes
Two genetically engineered enzymes are produced simultaneously from a series of chemical and biological processes: Q enzyme and Y enzyme. The cost per batch of Q and Y enzymes is $200,000, resulting in 300 grams of Q and 200 grams of Y. Before Q and Y can be sold, they must be processed further at costs of $100 and $150 per gram, respectively. Each batch requires one month of processing time and only one batch per month is produced.
The monthly demand for Q and Y depends on the price charged. The following table summarizes the various price-quantity combinations.
Quantity Sold | Price per Gram of Q | Price per Gram of Y |
50 | $1,200 | $750 |
100 | 1,100 | 550 |
150 | 1,000 | 350 |
200 | 900 | 150 |
250 | 800 | n.a. |
300 | 700 | n.a. |
In the following analysis, the optimum price of Q is $900 per gram and the optimum price of Y is $750 per gram.
Quantity Sold | Price per Q | Revenue ofQ | Total Cost of Q* | Total Profit | Price per Y | Revenue from Y | Total cost of Y† | Total Profit |
50 | $1,200 | $60,000 | $25,000 | $35,000 | $750 | $37,500 | $27,500 | $10,000 |
100 | 1,100 | 110,000 | 50,000 | 60,000 | 550 | 55,000 | 55,000 | 0 |
150 | 1,000 | 150,000 | 75,000 | 75,000 | 350 | 52,500 | 82,500 | (30,000) |
200 | 900 | 180,000 | 100,000 | 80,000 | 150 | 30,000 | 110,000 | (80,000) |
250 | 800 | 200,000 | 125,000 | 75,000 | n.a. |
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300 | 700 | 210,000 | 150,000 | 60,000 | n.a. |
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*Cost per gram of Q + ($200,000/500) + $100 + $500/gram.
†Cost per gram of Y = ($200,000/500) + $150 + $550/gram.
Required:
a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and $750 for Y.
b. What should management do if the cost per batch rises to $225,000?
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