Ira Johnson, Jr.
November 19, 2012
Dr. Caryn Callahan
In an effort to better serve the CVS Pharmacy consumer base, the need to offer a wider variety of prescription medication selections and options system-wide. In this proposal, assumptions about the elasticity of demand and the market structure for these medications and expanded services will be included. Additionally, how the expansion will increase revenues will be explained. Further, a rationale for determining the profit-maximizing quantity will be provided. Decisions will be made by using the concepts of marginal costs and marginal revenue to maximize profit. A mix of pricing and non-pricing strategies will be suggested. This proposal will also explore options of creating or increasing barriers to entry. Further, increased product differentiation will be discussed. Finally, other way to minimize costs will be explored. Increasing Revenue
In 2011, total prescription sales in the United States increases approximately 3.5% to $319.9 billion from $308.6 billion the previous year. Despite pressure from generic drugs, this increase represents a rise in dispensed prescriptions for 3.99 billion in 2010 to 4.02 billion the following year (Lindsley, 2012, p. 630). This increase, however, is representative of the trend of annual growth of 5% or less since 2007—a result of the recession and consumer response of switching from brand name to generic prescription drugs (Bartholow, 2012). In response to this trend, CVS Pharmacies need to expand their product offerings to include more or all of the Top 200 prescription drugs to increase revenue by increasing volume sales. To accomplish this goal, automated dispensing and verification systems should be put in place system-wide. Several options are available, including models with counting and error prevention systems; hands-free cassette dispensing and unique double counting; and compact, robotic dispensing systems that automatically label and dispense 35-40% of total orders (Kirby Lester, 2012). Profit-Maximizing Quantity
According to Huter (2012, p. 1):
Calculating the quantity that will maximize profits requires that you understand the economic concept of marginal analysis. Marginal analysis is the study of incremental changes in profit. The quantity that maximizes profit is where marginal profit shifts from positive to negative. Assuming the quantity is the amount of prescriptions CVS hopes to sell, as sales increase, so do expenses. When those expenses rise to a number that no longer maximizes profits, marginal profit then becomes negative. To calculate the profit-maximizing quantity, the company’s sales and expense reports are needed along with documenting and computer devices or software. Determining the profit-maximizing quantity is a four-step process: 1. Determine profits for each level of sales. For simplicity’s sake, assuming that CVS sells each prescription for $25, as sales increase, so do the costs associated with labor, increased shrinkage, quantity discounts, raw materials, commissions, and other variable costs. Therefore, if the pharmacy sells 20 prescriptions, the profit would be $250; for 40 prescriptions, $350; 60 prescriptions, $550; and for 80 prescriptions, the profit would decline to $500. 2. Determine the marginal profit at each incremental increase in sales. “Marginal profit is defined as the change in profit for each additional unit sold (Huter, 2012, p. 2). Assuming a unit is an increment of 20 prescriptions, increasing sales from zero to 20 prescriptions produces a marginal profit of $250. An increase in sales to 40 prescriptions produces a marginal profit of $100. From 40 to 60, $200; and from 60 to 80, $50. 3. Determine the profit maximizing quantity. In this example, the profit-maximizing quantity is 60 prescriptions. Beyond this point, marginal profit becomes negative because it is likely that variable costs...