Augustine Medical Must Determine How Research Proposal

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The first is $995 for the unit and $12 for the blankets. The second is $1,499 for the unit and $20 for the blankets. The third is $3,995 for the unit and $22 for the blankets. The fourth is $5,000 for the unit and $25 for the blankets. Fixed costs are $500,000. The contribution margin is expected to be 70% on the units and 60% on the blankets on the delivered price.

Our demand estimates are derived based on the price relative to the main competitors, and take into consideration the impact of having to gain formal approval beyond the $1,500 price point. We have also assumed that wherever we set our price point, we will need to offer a discount. Buyers expect to receive a discount, so we believe that even if we offer a low price point there will be a psychological need on the part of the buyer to receive a discount; not offering one could compromise sales.

The $995 machine and $1,499 machine will be able to capture significant market share, because they are price below existing inferior technologies. These rates also come with lower blanket costs. The $995 machine offers blanket costs of $14, lower than our competitors. This will help lower operating costs for hospitals by 30-41% over existing disposable blanket costs. At 10 million surgeries, this represents a significant savings. For this reason we feel that the $995 machine and $14 blankets will be able to capture a 60% market share. The $1,499 machine with the $20 blankets will capture a smaller, but still significant market share, perhaps 40%.

The $3,995 machine with the $22 blankets is comparably priced against competitors.

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We believe the Bear Hugger represents superior technology. This will allow us to capture some of the market, maybe 15%. We feel that the highest price point, $5,000 for the machine and $25 for the blankets, best represents the value of our technology. However, at these levels, the price elasticity between us and our major competitors would limit our sales. We expect that we would only be able to capture a 5% market share if we priced ourselves above our competitors. Our estimated market is 7,560,000 surgeries for the number of blankets and 2117 machines. The blankets at the $14 range would contribute the following, based on 50% discount and 40% commission on delivered price.

The contribution at the $995/$14 price point is therefore: $14 * 50% = $7 delivered price

6 = Net sale = $4.20 minus $0.85 cost = $3.35 contribution

7,560,000 * 60% market share = 4,536,000 blankets * $3.35 = $15,195,600

For the units, we have a 40% discount and 30% commission. $995 *.6 = $597 delivered price. $597 *.7 = $417.90 net. Less $380 cost = $37.90 contribution * $80,234.30.

The total contribution at this price point is thus $15,275,834.

Using these same calculations, the contribution $1,499/$20 with a 40% market share is $15,784,744.

The contribution at the $3,995/$22 and 15% market share is $6,932,678. The contribution at the $4,999/$25 level and 5% market share is $2,735,879.

What emerges from this examination is that the disposable blankets are by far the most significant contributor. However, because the costs.....

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