# Question

Merck is considering launching a new drug called Laffolin. Merck has identiﬁed two possible demand scenarios:

DEMAND LEVEL PROBABILITY

1 million patients....... 30%

2 million patients........ 70%

Merck also has the following information:

Revenue.......... $140 per patient

Fixed costs to manufacture

and sell Laffolin........ $70 million

Variable costs to manufacture

and sell Laffolin........ $80 per patient

Maximum number of patients

that Merck can handle......3 million

a. How many patients must Merck have in order to break even?

b. How much money will Merck make if demand for Laffolin is 1 million patients? If demand is 2 million patients?

c. What is the expected value of making Laffolin?

d. Draw the decision tree for the Laffolin decision, showing the proﬁts for each branch (Total revenues total variable costs - total ﬁxed costs) and all expected values.

DEMAND LEVEL PROBABILITY

1 million patients....... 30%

2 million patients........ 70%

Merck also has the following information:

Revenue.......... $140 per patient

Fixed costs to manufacture

and sell Laffolin........ $70 million

Variable costs to manufacture

and sell Laffolin........ $80 per patient

Maximum number of patients

that Merck can handle......3 million

a. How many patients must Merck have in order to break even?

b. How much money will Merck make if demand for Laffolin is 1 million patients? If demand is 2 million patients?

c. What is the expected value of making Laffolin?

d. Draw the decision tree for the Laffolin decision, showing the proﬁts for each branch (Total revenues total variable costs - total ﬁxed costs) and all expected values.

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