Benco limited is a medical laboratory which researches, develops and manufactures a wide range of drugs. One of these drugs, Taebia, is a pain relief drug used for the treatment of headaches and until last month Benco limited had a patent on Taebia which prevented other companies from manufacturing it. The patent has now expired and several competitors have already entered the market with similar versions of Taebia, which are made using the same active ingredients.

Benco is reviewing its pricing policy in light of the changing market. It has carried out some market research in an attempt to establish an optimum price for Taebia. The research has established that for every Ghc 5 decrease in price, demand would be expected to increase by 8,000 units, with maximum demand for Taebia being Two million units.

Each units of Taebia is currently made using the following materials:

AB: 300 grams at Ghc 0.50 per gram

AS: 400 grams at Ghc 0.30 per gram

Each unit of Taebia requires 30 minutes of machine time to make and the variable running costs for machine time are Ghc 3 per hour. The fixed production overhead cost is expected to be Ghc 4 per unit for the period, based on a budgeted production level of 350,000 units.

The skilled workers who have been working on Taebia until now are being moved onto the production of Benco limited new and unique anti-malaria drug which cost millions of Ghana Cedis to develop. Benco limited has obtained a patent for this revolutionary drug and it is expected to save millions of lives. No other similar drug exists and, whilst demand levels are unknown, the launch of the drug is eagerly anticipated all over the world.

Staff, who are new to the production of Taebia and cost Ghc 15 per hour, will be brought in to produce Taebia for the foreseeable future. Experience has shown there will be a significant learning curve involved in making Taebia as it is extremely difficult to handle. The first units of Taebia made using one of the agency workers took 7 hours to make. However, it is believed that an 90% learning curve exists, in relation to production of the drug, and this will continue until the first 2,000 units have been completed.

Benco limited management has said that any pricing decisions about Taebia should be based on the time it takes to make the 1,000th unit of the drug.

Required

(a) Calculate the optimum (profit-maximising) selling price for Taebia and the resulting annual profit which Benco limited will make from charging this price.