Question 45

Increase prices to increase total sales revenue

By increasing prices, the pharmaceutical firm can directly impact its total sales revenue, which can help maintain profit margins despite rising production costs. This strategy is often employed in industries where unique, patented products have little to no direct competition.

A) Increase prices to increase total sales revenue

This option is correct because raising prices can lead to higher revenue, which is essential when production costs are increasing. If the demand for the medication remains relatively inelastic (meaning consumers will continue to buy despite price increases), this strategy can effectively preserve profit margins.

B) Accelerate payments from current customers

While accelerating payments may improve cash flow, it does not address the fundamental issue of rising production costs. This option does not directly impact revenue or profit margins, making it an ineffective strategy for the firm's goal of preserving profits.

C) Lower inventory to reduce inventory-related costs

Although reducing inventory can decrease related costs, it does not directly relate to preserving profit margins when production costs rise. This option may lead to stock shortages or lost sales if demand remains high, ultimately harming the firm's profitability.

D) Borrow money to increase leverage

Borrowing money may provide short-term liquidity, but it does not solve the problem of increasing production costs affecting profit margins. Additionally, increased debt can lead to higher interest expenses, which could further squeeze profits in the long run.

Conclusion

Increasing prices is the most effective strategy for the pharmaceutical firm to preserve its profit margins amidst rising production costs. While other options may offer temporary benefits, they do not directly address the need for increased revenue in light of escalating costs, making them less viable for achieving the firm's financial goals.