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Narcolarm, Inc. (E)
Author(s):
Young, David W.
Functional Area(s):
   Financial Accounting
   Management Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 2
Teaching Note: Available. 
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First Page and the Assignment Questions:

Not long after completing her residency in neurology, Mary Lou Black, M.D. became quite disenchanted with the practice of medicine. Shortly after she began her private practice, she was beset with more administrative and regulatory requirements than she had ever thought possible. Moreover, the hospital where she had admitting privileges had begun to insist that all its physicians participate in determining clinical treatment protocols for patients with the most common diagnoses, a practice that Dr. Black found distasteful.

During her residency and for the years that followed, Dr. Black had specialized in the treatment of narcolepsy, a neurological disorder that resulted in individuals falling asleep during periods of high emotional activity or stress, and occasionally during periods of relative inactivity. Although drug treatments had been found that would allow narcoleptics to lead relatively normal lives, the one area where they frequently encountered difficulty was in driving. For obvious reasons, if a narcoleptic's drugs should fail to work while the individual was driving, the results could be fatal. As a result, many narcoleptics were unable to drive.

During her work with narcoleptics, Dr. Black had begun experimenting with a device that could be used to keep them awake while driving. The device was quite simple: it was a small alarm, powered by a miniature battery, all of which could be inserted in an elongated plastic case that hooked over the driver's ear, much like a hearing aid. When the driver's head was erect, the device was silent, but as soon as the driver's head began to tip forward or backward, as it would if he or she were falling asleep, the device would sound an alarm and administer a small electric shock, awakening the driver.

Her increasing disenchantment with medical practice, coupled with the potential success for her “Narcolarm,” as she called the device, led her to resign her position on the hospital staff and devote her full attention to the invention.

Having secured financing for her venture, Dr. Black was attempting to get her production and marketing activities underway. In conjunction with this, there were several questions that she thought important to answer soon. First, at her anticipated sales price of $10 per unit, how many Narcolarms would she need to sell in order to cover all her costs? Second, if she wanted to earn a modest before-tax profit of, say, $60,000 in her first year of operations, how many units would she need to sell? . . .

Assignment

  1. How many units must Narcolarm produce and sell to break even? How many units would the organization have to produce and sell in order to cover all costs and earn a profit before taxes of $60,000?
  2. If sales of 25,000 units a year can be reached, how much must Dr. Black charge per Narcolarm in order to break even?
  3. What price should Dr. Black use for a Narcolarm?
  4. Based on cost considerations only, should Dr. Black accept the local businessman's offer?
  5. In addition to cost information, what else should Dr. Black consider in her decision to accept or reject the offer?
  6. What do you think of Dr. Black's venture?