7. Assume the demand for the drug Wozac during the current year is 50,000, and assume demand will grow at 5% a year. The company wants to build a new plant to produce the drug and wondering how large a plant to build. If you build a plant that can produce x units of Wozac per year, it will cost $6x. Note that this is the fixed cost of building the plant. It costs $0.40 per year to operate a unit of capacity. Each unit of Wozac produced incurs a variable production cost of $0.20. Each unit of Wozac is sold for $3. Assume that the price, variable cost, and cost for capacity do not change for the next ten years. Determine how large a Wozac pla

Wozac Drug Plant

The Wozac drug plant should be large enough to produce 81,450 units by Year 10.

Explanation:

a) Data and Calculations:

Current demand = 50,000 units

Demand growth = 5% a year

Period of growth = 10 years

Annual operating capacity cost = $0.40 per unit

Variable production cost = $0.20

Selling price = $3

Absolute growth factor in 10 years = 1.629 (1 + 0.05)ⁿ

where n = 10 years

Demand in 10 years will be equal to 81,450 (50,000 * 1.629)

Fixed cost of building = $6x,

where x = 81,450

= $488,700

b) Projected Income Statement for Year 10:

Sales Revenue =    $244,350 (81,450 * $3)

Cost of gods               16,290 (81,450 * $0.20)

Gross profit           $228,060

Operating cost          32,580 (81,450 * $0.40)

Annual depreciation 48,870 (488,700/10)

Pre-tax Income      $146,610

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