Gsm Pharmaceuticals - Case Study

Topics: Investment, Rate of return, Generally Accepted Accounting Principles Pages: 3 (765 words) Published: October 29, 2012
Case Study: GSM Pharmaceuticals

GB 519
Measurement and Decision Making
Unit 1

Introduction
Elaine Shumate has worked for more than the past seven years for GSM, a pharmaceutical research company. She has been receiving increased responsibility, but her knowledge and experience has not prepared her for the information requested by Blake Walton, the vice president of research. Mr. Walton has a meeting scheduled with the board of director’s to ask for additional investment funds based on Elaine’s projection of a patent the company intends to sell to large pharmaceutical companies for use in medication production. Her latest research results do not look as good as previously thought. Mr. Walton requested she revisit the figures. The company’s earlier cost estimates and operating income projection were $140 million dollars and the annual operating income was approximately $25 million. Given these results, MIP may have fewer applications in the pharmaceutical industry than originally believed. The estimates for ROI are as follows according to the original figures: Sales -Operating Income = Margin

$140 million-$25 million=$115 million

Sales /Average Operating Income =Asset Turnover
$140 million/15.18 million=9.22%

Margin*Asset Turnover=ROI
$115 million*9.22% = 10.60%

Average Operating Income 17.86 + 12.50 = 30.36/2 =15.18 Blake 25/140= 17.86%
Richard17.5/140= 12.50%

The difference in estimation is 5.36% of annual operating income.

The estimates for ROI if Elaine uses Richard Lawrence’s new revenue projections would be:

Sales -Operating Income = Margin
$140 million-$17.5 million=$122.5 million

Sales /Average Operating Income =Asset Turnover
$140 million/12.5 million=11.20%

Margin*Asset Turnover=ROI
$122.5 million*11.20 million = 13.72%

Advice for Elaine
Elaine feels pressure to deliver “good news” to Blake. I...
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