Question: Forever Young Inc. has developed a drug
Forever Young Inc. has developed a drug that will diminish the effects of aging. Forever Young has spent $1,000,000 on research and development and $2,108,000 for clinical trials. Once the drug is approved by the FDA, which is imminent, it will have a 5-year sales life cycle. Laura Russell, Forever Young’s chief financial officer, must determine the best alternative for the company among three options. The company can choose to manufacture, package, and distribute the drug; outsource only the manufacturing; or sell the drug’s patent. Laura has compiled the following annual cost information for this drug if the company were to manufacture it:
Management anticipates a high demand for the drug and has benchmarked $245 per unit as a reasonable price based on other drugs that promise similar results. Management expects sales volume of 3,000,000 units over 4 years and uses a discount rate of 10 percent.
If Forever Young chooses to outsource the manufacturing of the drug while continuing to package, distribute, and advertise it, the result would be a reduction of fixed manufacturing cost from $5,000,000 to $1,350,000 and an increase of variable manufacturing costs from $70 to $74 per unit. For the sale of the patent, Forever Young would receive $300,000,000 now and $25,000,000 at the end of every year for the next 4 years.
Required:
1. Determine the life-cycle income for each option.
2. Which option would you recommend for Forever Young? Support your answer.
> Obtain a copy of the following article: John H. Fleming, Curt Coffman, and James K. Harter, “Manage Your Human Sigma,” Harvard Business Review, July–August 2005, pp. 107–114 (available at https://hbr.org/2005/07/manage-your-human-sigma). The authors of t
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