Cost Alternatives
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Scenario
Other issues are facing Wallingford Pharmaceuticals. The company had not kept up with modern manufacturing technology and was in the process of modernizing the injectable manufacturing facilities in Pueblo and Colorado Springs. There were several modernizing scenarios under analysis. Perform cost benefit analysis calculations for two equipment scenarios. The data are provided below.
Scheduling the various manufacturing operations has become more complicated. In the 1990s, the Pueblo plant expanded tremendously, based on forecasts for the growth of a promising osteoporosis medication, Osto54. The facility doubled in size, mostly with tanks and processing equipment. Osto54, however, caused heightened enzyme levels in the liver and led to seven deaths in the elderly due to drug interactions. Wallingford faced millions in liability suits and had excess intermediate manufacturing capacity in Pueblo.
Two years ago, a new immune system treatment, Ultamyacin, was discovered by a Wallingford researcher. The drug could be manufactured at the Pueblo facility for the bulk manufacturing, but the final manufacturing steps could be made in Puerto Rico for final purification and then sent to Fort Collins for final manufacturing into sterile bottles for injection.
Wallingford leadership has narrowed the decision making down to two options. The first is a higher technology option in one location, and the other is a lower technology option in several locations.
Assignment
Use applicable business formulas to determine costs for both options. Consider the following questions:
Which is the lead cost alternative in Years 1, 5, and 10?
How much would the variable cost per unit have to be in Year 5 for the automated alternative to justify the additional annual fixed cost of the automated alternative over the manual alternative?
High Technology Centralized Location Low Technology Decentralized
Annual fixed cost $620,000 $110,000
Variable cost/product $16.31 $18.89
Estimated annual production
(in number of products): Year 1 $100,000 $100,000
Year 5 $170,000 $170,000
Year 10 $225,000 $225,000
What other factors should be considered when deciding the following?
When to centralize manufacturing or not
When to opt for higher technology options
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