Discontinuing a Missile Program Merowak Missiles has developed its Democratizer Offensive Weapon System (DOWS) for the US military. After sinking $1 billion into R&D and design, it spent $0.5 billion building the tools and production facility that are
unique to DOWS production. It houses these in standard factory floor space that costs $1 million. Each missile has a marginal cost of $2,000 . The Pentagon is thinking of discontinuing the program because the missiles are too expensive. If Merowak were to get an order for 50,000 missiles, what would its breakeven price be?
The marginal cost of $10,000,000 ($2,000 * 50,000 . can be avoided if the product were discontinued. The $1 billion R&D and design costs and $0.5 billion for specialized tools and facility are sunk. The $1 million for the factory floor space can be avoided because it can be repurposed for any manufacturing. So the average avoidable costs are $2,000 + $1 million / 50,000 = $2,020 per missile.
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