Ecstasy Pharmaceuticals faces fixed costs with their new drug of $1,000,000. The company sells the drug in bottles of 50 pills for ten dollars. They estimate that they must sell 200,000 bottles to break even. What is the total cost to produce a bottle of 50 pills?

Question

Bruce Hogan

Business

25 July, 05:52

Ecstasy Pharmaceuticals faces fixed costs with their new drug of $1,000,000. The company sells the drug in bottles of 50 pills for ten dollars. They estimate that they must sell 200,000 bottles to break even. What is the total cost to produce a bottle of 50 pills?

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Answers (1)

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Sandra Valencia · Answer 1

The total cost to produce a bottle of pill is $5

Explanation:

Break-even in unit is calculated by dividing the fixed costs by contribution per unit.

Here the breakeven is given in terms of bottles thus our unit is bottles.

Plugging in the values,

200000 = 1000000 / CM per unit

CM per unit = 1000000 / 200000

CM per unit = 5

Contribution per unit is calculated as the Selling price per unit - variable cost per unit.

If selling price per unit is $10, then variable cost per unit will be:

CM per unit = SP - VC

5 = 10 - VC

VC = 10 - 5

VC = 5 per unit

The total cost to produce a bottle of pill is $5 as the fixed cost will vary depending on the number of units produced thus the actual cost that every one unit of bottle requires is $5.