BioMed manufactures prescription topical cream called DermaPlusTM which is used for treating certain skin conditions. The main buyers of DermaPlusTM are hospitals and pharmacies. The topical cream category is extremely competitive and has led to BioMed’s market share to be small. Due to the size of BioMed’s market share they are unable to influence the market price. We also must assume that the market of BioMed can be modeled as being perfectly competitive in equilibrium, allowing the use of the model’s profit maximizing criteria.The plant producing DermaPlusTM has been in operation for three years with no change in manufacturing equipment. The age of the equipment has not proven to have an impact on current or future production of DermaPlusTM based on the information provided. DermaPlusTM will be under a new reference-based pricing scheme which will allow the government to set the price of BioMed’s topical cream along with competing creams. The government will review the pricing every two years, leaving only the production and selling volume to be determined by the manufacturer.We must assume the estimates for short-run cost functions to determine the profit-maximizing output level to be accurate based on previous calculations provided by BioMed. This information is also used to determine the optimal size for the new unionized workforce. As we have been advised the company is in a risk-neutral position and wishes to maintain this strategy. Scope This report will determine the profit-maximizing average monthly production capacity for each reference-based prices of $50. 00 per unit, $100. 0 per unit and $150. 00 per unit and estimate the expected monthly profit at each reference-based price. This report will also recommend an average daily production capacity for the next twelve months to determine the size of the manufacturing plant’s unionized workforce. This report will not cover possible impacts of aging manufacturing equipment as we do not have the appropriate level of information provided. It will also not take into consideration the addition of any new equipment to the manufacturing process.This report will also not cover the government pricing assessment, competitive products or competitive current pricing structure. We will also not discuss, review or analyze the competitive landscape or provide any focus group feedback on the actual product or market size as we do not have any of this information available. Major Issues DermaPlusTM distribute their product primarily to hospitals and pharmacies and have a strong competitor base that distribute a similar product of topical cream but we do not know the comprehensive target market based on the information provided.DermaPlusTM has a small portion of the market and therefore, is unable to influence the market price and will be subject to the price being set largely due to the competition. This will be rectified with the new pricing structure that will be implemented in two months by the government. As there are numerous comparable products on the market there is not one product that is a differentiator therefore, lending only the retail as the single product distinguisher. Any potential customers are unable to determine the need to purchase DermaPlusTM over any other product roduced by the competitor. The product value proposition is unknown to the consumer. The ability for BioMed to adjust their workforce as needed based on product demand will shortly be removed due to the implementation of a union. This will significantly impact the cost structure of BioMed as they will need to adjust the part-time labor to production ratio. BioMed will also need to adjust their full-time employment to accommodate production. Due to the lack of information being provided by the government we estimate that there is a 5% chance the price will be set at $50. 0, a 20% chance the price will be set at $100. 00 and a 75% chance the price will be set at $150. 00. Analysis In our analysis we will be addressing the issue of fixing production capacity of the company as to determine the labor size that could be fixed before workforce unionization. Labor force and output cannot be varied easily once it occurs. As the company is a price-taker and we do not know what exactly the associated probabilities may be, we must identify the profit maximizing output the company would be producing over the future months.Our analysis did not indicate or take into consideration the need for new equipment or the addition of new equipment and therefore, the recommendation is based on current state. In our analysis we determined the equations for total cost and marginal cost using the average cost obtained from the regression model provided, and the fixed costs estimates in the collected data calculated by a previous resource endorsed by the company. Once we have determined the marginal cost equation, we calculated the output for perfect competition profit maximizing criteria P = MC.This calculation is determined for each of the probable market prices for DermaPlusTM topical cream after the two months. Our analysis indicates for $50. 00, $100. 00 and $150. 00 per unit the company should respectively produce 342, 407 and 456 units daily which would generate a daily profit of a loss of $249, gain of $18,575 and a gain of $40,190. The consultant estimated that there would be a 5% chance the price would be set at $50. 00 per unit, a 20% chance the price would be set at $100. 00 and a 75% chance the price would be set at $150. 00 per unit. Conclusions Given the uncertainty of price to be announced for DermaPlusTM, the isk-neutral approach would be to adjust the production capacity based on the expected price determined by the estimated probability distribution. The price estimates indicate a value of $135. 00 indicating the daily production should be 442 units to maximize expected profit. Recommendations I recommend BioMed choose a workforce size to manufacture 442 units of product. The current months output was 450 units of topical cream. The company would need to release a few employees prior to unionizing the workforce in order to reach the optimum level of output for the next twelve months.Appendix I Appendix II Determine the profit-maximizing average monthly production capacity for DermaPlusTM for each of the possible reference-based prices identified by the consultant. Estimate the expected monthly profit in each case. a. TFC (Total Fixed Costs) = 9,000 b. AVC (Average Variable Cost) = 82. 144 – 0. 41197Q + 0. 000711Q2 * TC (Total Cost) * = TFC + Q x AVC * = 9,000 + Q (82. 144 – 0. 41197Q + 0. 000711Q2) * = 9,000 + 82. 144Q – 0. 41197Q2 + 0. 000711Q3 * MC (Marginal Cost) * = d (TC/dQ) * = 82. 144 – 0. 82393Q + 0. 02132Q2 Reference-based pricing I = $50. 00 Profit maximization in perfect competition (P = MC) 50 = 82. 144 – 0. 82393Q + 0. 002132Q2 0. 002132Q2 – 0. 82393Q + 32. 144 = 0 Q = 44, 342 Q = 44, Profit= TR-TC = 44 x 50 – (9000 + 82. 144*44 – 0. 41197*442 + 0. 000711*443) = -9,677 Q = 342, Profit = TR-TC = 342 x 50 (9000 + 82. 144*342 – 0. 41197*3422 + 0. 000711*3423) = -249 Q = 44 is a profit minima and Q=342 is profit maxima AVC = 24. 4 at Q=342, price is greater than average variable cost therefore, the company would continue production. P = $50. 0, Q=342 and the expected daily profit = -$249. Expected monthly profit = 30*-$249 + -7,470. II = $100 100 = 82. 144 – 0. 82393Q + 0. 00212Q2 0. 002132Q2 – 0. 82393Q – 17. 856 = 0 Q = -21, 407 Q = 21 is profit minima and Q=407 is profit maxima P = 407*100 – (9000 + 82. 144*407 – 0. 41197*4072 + 0. 000711*4073) = 18,575 P = $100, Q=407 and the expected daily profit = $18,575 Expected monthly profit = 30*$18,575 = $557,250 III=$150 150 = 82. 144 – 0. 82393Q + 0. 00212Q2 0. 002132Q2 – 0. 82393Q – 67. 856 = 0 Q = -70, 456 Q = -70 is profit minima and Q=456 is profit maximaProfit = 456*150 – (9000 + 82. 144*456 – 0. 41197*4562 + 0. 000711*4563) = 40,190 P = $150, Q=456 and the expected daily profit $40,190 Expected monthly profit = 30* $40,190= $1,205,700 Recommend an average daily production capacity for the next 12 months given the uncertainty about the price of DermaPlusTM. Your recommendation will be used to set the size of the manufacturing plant’s unionized workforce. (Note: you simply have to determine the best daily production capacity for the next 12 months, not the number of workers required). Average daily production is “Q”.Then “Q” should be such that expected daily profit is maximized. As stated there is a 5% chance of the price to be set at $50. 00, 20% chance the price will be set at $100 and 75% chance the price will be set at $150. Expected price Pe = 0. 05*50 + 0. 20*100 + 0. 75*150=135. Expected profit maximizes at Pe = MC 135 + 82. 144 – 0. 82393Q + 0. 00212Q2 0. 0021232Q2 – 0. 82393Q – 52. 856 = 0 Q = 442 Average daily production capacity should be 442 units to maximize expected profit. (442*135 – (9000 + 82. 144*442 – 0. 41197*4222 + 0. 000711*4223) = $33,451