Cost Analysis of Projects

Cost Analysis of Projects

Introduction

Being a pharmaceutical company, Smitheford Pharmaceuticals is concerned about varying lifecycles of its products. To overcome this, company has been planning to launch new technological products in the market. In this report, we will analyse and evaluate different options that Smitheford Pharmaceuticals has as its new products. The report will discuss different costs associated with a pharmaceutical company like Smitheford Pharmaceuticals. We will also discuss different capital investment techniques which can be used, and in light of the results from those techniques, we will evaluate which option of the two options suits the company more (Sweeting, J., (1997)). As for any company, sustainability is as important as initial success, we will also recommend different strategic control measures which can be used by us to make sure our new product remains successful and sustainable in the marketplace for a longer term.

Discussion

Most of the technological products have their own distinct cost structures. This is due to the nature of technological products being different from other non-technological products. Technological products are often found to have high initial cost of production. On the other hand, they have very low variable cost of production once a product is fully developed. Pharmaceutical companies spend lots of their resources to research and develop new innovative technological products. And that is one of the reasons why pharmaceutical companies incur most of their costs in this phase. But once this phase is completed, producing additional units of the same product is often found not to be too costly.

Provided Data Regarding Projects

High Technology (Centralized Location)

Low technology (Decentralized Location)

Annual Fixed Cost

620,000

110,000

Variable Cost

16.31

18.89

Estimated Production

Year 1

100,000

100,000

Year 5

170,000

170,000

Year 10

225,000

225,000

1. Which is the lead cost alternative in Years 1, 5, and 10

This question can be answer with the help of mathematical formula. Given below is the calculation for both projects during the period of 1, 3 and 5 years.

First Year Cost Calculation

Year 1

 

High Technology (Centralized Location)

Low technology (Decentralized Location)

Total Units Produced

100,000

100,000

Variable Cost per unit

16.31

18.89

Total Variable Cost (Per unit cost * Total Units)

1,631,000

1,889,000

Total Fixed Cost (TFC)

620,000

110,000

Total Cost (TFC +TVC)

2,251,000

1,999,000

Fifth Year Cost Calculation

Year 5

 

High Technology (Centralized Location)

Low technology (Decentralized Location)

Total Units Produced

170,000

170,000

Variable Cost per unit

16.31

18.89

Total Variable Cost (Per unit cost * Total Units)

2772700

3211300

Total Fixed Cost (TFC)

620,000

110,000

Total Cost (TFC +TVC)

3,392,700

3,321,300

Tenth Year Cost Calculation

Year 10

 

High Technology (Centralized Location)

Low technology (Decentralized Location)

Total Units Produced

225,000

225,000

Variable Cost per unit

16.31

18.89

Total Variable Cost (Per unit cost * Total Units)

3669750

4250250

Total ...