You have been hired to join the team of Dentifrice Advances, Inc., a startup with a mouthwash product developed for people who cannot brush their teeth. The mouthwash contains a microparticle capable of specifically targeting bacteria within the mouth cavity, then attaching and releasing a dose of chlorhexidine antimicrobial. This benefits daily-use patients as it significantly reduces exposure to chlorhexidine, thereby greatly reducing side effects of this somewhat toxic compound. So far, the founders have identified periodontists as their initial target market. Periodontists buy bulk chlorhexidine mouthwash for $30/ bottle (500mL ) 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: 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 - Labor - Other production overheads (not including equipment) $0.24 $0.33 $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: Product development costs estimated at $4.7 million Regulatory approval costs estimated at $1.3 million Your role on the team is to help make good business decisions. In this capacity, you've been asked to do the following: 1. Sentence 1, paragraph 1 of the text says "this book is about decision making". To convince the founders that you're qualified, write a summary (2-3 paragraphs) 2. Categorize the various costs listed above in terms of the list below and give a short definition. If there is no matching dollar amounts, state how the concept applies to economic decisions (in a sentence or two). (15 points) a. Variable costs b. Fixed costs c. Overhead d. Profit e. Sunk costs f. Impact of making design changes late in the program g. Opportunity costs 3. If the learning curve for labor is 85% and steady-state manufacturing is reached in the first year of production (600,000 units), what will the labor cost be for the first few units produced? (10 points) 4. Assume that you have found an Angel Investor willing to give you $250,000 today in exchange for $2.5 million in 5 years. Answer the following using hand calculations: (20 points) a. Comparing to typical stock market returns ( 9% per year), how does this investment stack up in terms of future value? b. Suppose you and your founders have 10 credit cards each capable of charging $25,000 at an APR of 16% compounded monthly. Compare this option with part a) above. 5. Using a spreadsheet, complete your cost model (total costs, not per unit) of year 1 production using the following assumptions: (25 points) a. Per-unit material, labor, and overhead costs do not change over time b. Use straight-line depreciation over a 10 -year schedule at 4% interest for buildings c. Use double-declining depreciation over a 5 -year schedule at 0% interest for equipment d. Development and regulatory costs need to be recovered in 5 years equally at 8% interest e. Your cost model should culminate in calculating profit margin based on revenue. 6. Now convert your first-year model to a per-unit basis by: (15 points) a. Dividing depreciation by annual volumes b. Recalculating annual development & regulatory recovery based on volume using the gradient annuity equation, then divide by the annual volume. c. Again, culminate with profit margin calculation 7. The founders have contacted a marketing firm and received a quote to launch three variations of marketing campaign starting at product launch (time 0 ) and continuing for 15 years. Terms require that Dentifrice Advances pays for the campaign up front, but benefits will be received in the form of increased profits per year and increased brand value at the end of the campaign. Determine the best option from choices below assuming a 10% minimum attractive rate of return. ( 25 points) You have an option to outsource various levels of production to a toll chemical manufacturer, which would be an advantage if the market doesn't respond well to the product. Consider a scenario where annual volumes stay flat at 600,000 units. Calculate the EUAW vs. IRR curves plus choice table for the following choice options. ( 25 points)