Health for All (“H4A”) is launching a new innovative hand sanitizer. However, due to intense research and development required to meet regulatory requirements, H4A wants to ensure they charge the correct price to recover all these costs. Through their research they identified that if they charge $60 per bottle of sanitizer, 250 000 bottles will be demanded per year. They expect that the demand for sanitizers will fall in the next three years therefore they have estimated this product to have a life of 3 years. Given the current Covid-19 pandemic, many other businesses are also selling hand sanitizers. Therefore the market that H4A wants to enter has a very high elastic demand. It has thus been observed that if H4A increases its price by $2, the demand will fall by 2 000 bottles while a reduction in price by the same amount will increase demand by 2 000 bottles as well. The production of the sanitizers will incur the following costs per year at differing levels of production. Annual Production (units) 200,000 250,000 300,000 350,000 direct materials $2,400,000 $3,000,000 $3,600,000 $4,200,000 direct labor $1,200,000 $1,500,000 $1,800,000 $2,100,000 overheads $1,400,000 $1,550,000 $1,700,000 $1,850,000 required: a.) Calculate the variable cost of producing a bottle and the total fixed production overheads for H4A per year?
Question 1
Health for All (“H4A”) is launching a new innovative hand sanitizer. However, due to intense
research and development required to meet regulatory requirements, H4A wants to ensure they
charge the correct price to recover all these costs.
Through their research they identified that if they charge $60 per bottle of sanitizer, 250 000
bottles will be demanded per year. They expect that the demand for sanitizers will fall in the next
three years therefore they have estimated this product to have a life of 3 years.
Given the current Covid-19 pandemic, many other businesses are also selling hand sanitizers.
Therefore the market that H4A wants to enter has a very high elastic demand. It has thus been
observed that if H4A increases its price by $2, the demand will fall by 2 000 bottles while a
reduction in price by the same amount will increase demand by 2 000 bottles as well.
The production of the sanitizers will incur the following costs per year at differing levels of
production.
| Annual Production (units) | 200,000 | 250,000 | 300,000 | 350,000 |
| direct materials | $2,400,000 | $3,000,000 | $3,600,000 | $4,200,000 |
| direct labor | $1,200,000 | $1,500,000 | $1,800,000 | $2,100,000 |
| $1,400,000 | $1,550,000 | $1,700,000 | $1,850,000 |
required:
a.) Calculate the variable cost of producing a bottle and the total fixed production overheads for
H4A per year?
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