So far, the founders have identified periodontists as their initial target market. Periodontists buy bulk chlorhexidine mouthwash for $30/bottle (500 mL) and sell for $60 plus shipping. Our product will sell for $45/bottle due to the value of the added benefits. We also estimate that in year 6 our sales will be $254.8 million, which equates to an annual volume of 5.6 million bottles or 27,000 bottles per day. The volume ramp-up schedule is estimated to be:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
600,000	1.6 million	2.6 million	3.6 million	4.6 million	5.6 million

The founders have also developed estimates of costs for full production, development, and scale-up as follows:

At a volume of 5.6 million per year our per-unit production costs will be:

• Materials $0.24
• Labor $0.33
• Other production overheads (not including equipment) $0.70
• Other non-production costs:
  • Sales and marketing costs are estimated to be $8 million/year
  • We will need to invest $3.0 million in a new factory and $400,000 in production equipment
• Other indirect costs (management, accounting, etc.) are 8% of total cost
• Royalties to USD are 5% of sales
• Product realization costs prior to launch include:
  1. Product development costs estimated at $4.7 million
  2. Regulatory approval costs estimated at $1.3 million

Using a spreadsheet, complete your cost model (total costs, not per unit) of year 1 production using the following assumptions: (25 points)

1. Per-unit material, labor, and overhead costs do not change over time
2. Use straight-line depreciation over a 10-year schedule at 4% interest for buildings
3. Use double-declining depreciation over a 5-year schedule at 0% interest for equipment
4. Development and regulatory costs need to be recovered in 5 years equally at 8% interest
5. Your cost model should culminate in calculating profit margin based on revenue.