P 89: Enzymes

Two genetically engineered enzymes are produced simultaneously from a series of

chemical and biological processes: Q enzyme and Y enzyme. The cost per batch of Q
and Y enzymes is $200,000, resulting in 300 grams of Q and 200 grams of Y. Before Q
and Y can be sold, they must be processed further at costs of $100 and $150 per gram,
respectively. Each batch requires one month of processing time and only one batch per
month is produced.
The monthly demand for Q and Y depends on the price charged. The following table
summarizes the various price-quantity combinations.

Quantity Sold Price per Gram of Q Price per Gram of Y

50 $1,200 $750

100 1,100 550

150 1,000 350

200 900 150

250 800 n.a.

300 700 n.a.

In the following analysis, the optimum price of Q is $900 per gram and the optimum
price of Y is $750 per gram.

Quantity Price Revenue Total Total Price Revenue Total Total

Sold per Q of Q Cost of Profit per from Y cost of Profit
Q* Y Y
 50 $1,200 $ 60,000 $ $35,000 $750 $37,500 $ $10,000
25,000 27,500

100 1,100 110,000 50,000 60,000 550 55,000 55,000 0

150 1,000 150,000 75,000 75,000 350 52,500 82,500 (30,000)

200 900 180,000 100,000 80,000 150 30,000 110,000 (80,000)

250 800 200,000 125,000 75,000 n.a.

300 700 210,000 150,000 60,000 n.a.

Required:

a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and $750 for
Y.

b. What should management do if the cost per batch rises to $225,000?