Augustine Medical
...tients are clinically hypothermic. We at Augustine Medical have also projected that one system would be sold for every eight postoperative recovery room beds. In consideration to this projection, we have calculated that the possible hospitals we can target have a total of 67,200 patients (80% of 84,000). From that total estimate of patients, roughly 40,320 patients are clinically hypothermic and are of need of therapy. Given the demand for postoperative recovery room beds, we have estimated that hospitals with less than seven beds would not be very highly receptive to our product, the Bair Hugger Patient Warming System. Segmenting the hospitals with less than seven beds gives us a target market of 1,888 hospitals. We have targeted initial market share at 30 percent. We would sell our products to 566 hospitals (exhibit 1). If we assume that all hypothermic patients have been distributed equally amongst the 1,888 hospitals, then for each hospital there are 21 patients who are hypothermic daily (exhibit 1). Consequently, we provide our product to market segment of 566 hospitals each with 21 hypothermic patients allowing us to accommodate 12,096 (4.4 million patients/year) hypothermic patients daily, our initial target market. The Pricing A single Bair Hugger Patient Warming System unit heater/blower will accommodate around 12 patients within a 24 hour period (exhibit 1). With that in mind, we have estimated that our 12,906 hypothermic patients a day would need around 1008 (exhibit 1) unit heater/blower to accommodate them. Regarding our previous assumption that patients were equally distributed within the hospitals, each target hospital would require 2 heater/blower units (exhibit 1). Augustine Medical is offering two separate products, the heater/blower unit and the disposable blankets. We are able to subcontract the production of the heater/blower unit at a $385/unit cost, while keeping blanket manufacturing in-house at a cost of $0.85/blanket (exhibit 2). We would sell to our distributors at a 30 percent trade margin, $550. Distributors will agree to a volume discount of 40 percent with hospitals. We would also sell our blankets at a margin of 86 percent costing distributors $6 per blanket (exhibit 2). Distributors will also agree to a volume discount of 50 percent. Contribution Margin = unit selling price – unit variable cost / unit selling price Blanket = $6 - $0.85 / $6 Contribution Margin to Augustine = 30% Heater/Blower unit = $550 - $385 / $550 Contribution Margin to Distributor = 30% Sales & Break-even Analysis From exhibit 1, we estimated that our daily hypothermic patients count would average around 12096 patients daily. Roughly at the end of the year, we would have accommodated 4.4 million patients. We also know that the performance of the Bair Hugger would demand a total number of 1008 heat/blower units to provide treatment to our target market. Net Sales: Blanket 4.4 million/patients x $6/blanket = $26.5 million Heater/Blower unit 1008 x $550 = $550,000 Total Sales = $27 million Break-even: We are using a gross margin formula with consideration to multiple products we offer, blankets and units, a “weighted average” gross margin percentage. The blanket has a gross margin of 86% (exhibit 2). The unit has a gross margin of 30%. The blanket accounts for 98% (exhibit 2) of the unit sales of the firm while the units account for a small 2% of units sales of the firm, a sales mix of 49:1. Therefore, the “weighted average” gross margin is : Weighted average gross margin = Gross margin percentage x percentage of Sales Blanket = 86% x 98% 84% Unit = 30% x 2% 0.6% Therefore, Weighted average Gross Margin = 84% + 0.6% Weighted average Gross Margin = 84.6% Break-even Units = Fixed Costs / Weighted Gross Margin $500,000 (exhibit 2) / 84.6% $590,388 Blanket Break-even unit $590,388 x 98% (product mix) = $578,580 $578,580 / $6 (selling price) = 93,430 blanket units Heater/Blower Break-even unit $590,388 x 2% (product mix) = $11,808 $11,808 / $550 (selling price) = 21 units Conclusion After our analysis of the hospital market and of our target market, we have estimated a selling price of our blankets and heater/blower unit at $6 and $550 respectively. As far as turnover, our product turnover is uneven. Our blanket product turnover is much higher th...