Description
Smitheford Pharmaceuticals is facing other issues. The company had not kept up with modern manufacturing technology and was in the process of modernizing the injectable manufacturing facilities in Pueblo and Colorado Springs. There were several modernizing scenarios under analysis. Perform cost-benefit analysis calculations for 2 equipment scenarios. The data are provided below.
Scheduling the various manufacturing operations has become more complicated. In the 1990s, the Pueblo plant expanded tremendously, based on forecasts for the growth of a promising osteoporosis medication, Osto54. The facility doubled in size, mostly with tanks and processing equipment. Osto54, however, caused heightened enzyme levels in the liver and led to seven deaths in the elderly because of drug interactions. Smitheford faced the loss of millions of dollars in liability suits and had excess intermediate manufacturing capacity in Pueblo.
Two years ago, a new immune system treatment, Ultamyacin, was discovered by a Smitheford researcher. The drug could be manufactured at the Pueblo facility for the bulk manufacturing, but the final manufacturing steps could be made in Puerto Rico for final purification and then sent to Fort Collins for final manufacturing into sterile bottles for injection.
Smitheford leadership has narrowed the decision making down to 2 options. The first is a higher technology option in one location, and the other is a lower technology option in several locations.
| High Technology Centralized Location | Low Technology Decentralized | |
| Annual Fixed Cost | $620,000 | $110,000 |
| Variable Cost/Product | 16.31 | 18.89 |
| Estimated Annual Production | ||
| (in number of products) Year 1 | 100,000 | 100,000 |
| Year 5 | 170,000 | 170,000 |
| Year 10 | 225,000 | 225,000 |
Use applicable business formulas to determine costs for both options.
Consider the following questions:
- Which is the lead cost alternative in Years 1, 5, and 10?
- How much would the variable cost per unit have to be in Year 5 for the automated alternative to justify the additional annual fixed cost of the automated alternative over the manual alternative?
- Determine what other factors should be considered when deciding the following:
- When to centralize manufacturing
- When to opt for higher technology options
Please submit your assignment.
1000–1500 words. Please include references and intext citations. APA Format.
Explanation & Answer
Attached.
Answer outline to PLANNING SERVICES AND MANUFACTURING
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Question 1
Question 2
Question 3
Question 4
Question 5
Question 1
Lead cost for year 1
For the High technology alternative cost = Fixed cost + the variable cost
Therefore 620,000 + 16.31 × 100,000 = $2, 251,000
For the low technology alternative = fixed cost + variable cost
Therefore 110,000 + 18.89 × 100,000 = $1, 999,000
Cutler, Jessup, Kenkel, and Starr (2015) define lead alternative cost as the cost that is incurred if one
alternative was preferred over the other depending on the prevailing conditions. According to the trio,
they advise choosing a cost alternative that has the greatest values to a firm because there are more
benefits to be reaped on a long term. Thus given the prevailing conditions for the first years for the high
and low technology, the best alternative would be the low technology because of its lower cost to the
company.
Year 5
High technology alternative cost = the fixed cost + the variable cost
Therefore 620,000 + 16.31 × 170,000 = $3,392,700
Low technology alternative = the fixed cost + the variable cost
Therefore 110,000 + 18.89 × 170,000 = $3, 321, 300
Given the conditions between the high and low cost alternative the preferred cost is t...
