Table of Contents
Biovail Corporation, a large pharmaceutical company and had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. It is recently had its stock downgraded by a well-known pharmaceutical analyst and a number of other analysts were also scrutinizing the company. The outcome was not favorable, as Biovail's acquisition methods were labeled as unethical and their accounting practices were questioned. An investor with the company must decide if she will continue to invest in a company that has been identified with low ethical standards.
Biovail Corporation was one of Canada’s largest publicly traded pharmaceutical companies. Its products commercialized both directly in Canada and through strategic partners (internationally). The company was very expert in the development and large scale of manufacturing of pharmaceutical products. Besides that, Biovail’s stock had listed on both the Toronto and New York stock exchanges. Biovail filed annual reports to the U.S. SEC and prepared financial statements in accordance with both U.S. and Canadian generally accepted accounting principles (GAAP). Biovail Company engaged activities on enhance formulate of the existing drugs, clinical testing, manufacture and commercial pharmaceutical products and utilized advanced drug delivery technologies. On 30 September 2003, there was a truck carrying a shipment of Wellbutrin® XL from Biovail’s manufacturing facility in Manitabo to Biovail’s Distributor, North Carolina was involved in a multi-vehicle traffic accident near Chicago. The company announced that the loss of the quarterly earnings which target by $260 million is because of the truck accident happened. It contributed a significant unfavorable variance where the company estimated that revenue of the truck that involved in accident was in the range of $10 million to $20 million. There are several issues in this case which included accounting policy based on the revenue recognition; how Biovail Corporation should account the sales based on two different “Freight On Board” (FOB) point which are FOB Shipping point and FOB Destination point, and ethic of earning management where Biovail is suspected might significantly overestimate the value of the product that involved in the truck accident due to Biovail fail to meet its third quarter 2003 earnings guidance.
3.0 Questions and answer
1) How many truckloads of product are actually required to carry $10 million of product? Show your calculations. Step 1
Based on paragraph 3, page 3, it stated that 1 Wellbutrin XL tablet is estimated to be 1.5 cm3 which is including the packing space. While for interior dimensions of a typical 18-wheeler trailer is 17m x 4.5m x 2.5m Step 2
To make the calculation easier, we need to convert the trailer dimensions to centimetres before calculate the volumes. To convert meters into centimetres the ratio is: 1meter = 100 centimetres (End note 11) 17m= 1,700 centimetres
4.5m = 450 centimetres
2.5m = 250 centimetres
The next step calculates the volume of wheeler trailer.
Volume of a rectangular prism = a x b x c
Volume= 1,700 x 450 x 250
Volume of 18 wheeler trailer = 191,250,000 cm3
To find out how many Wellbutrin XL tablets fit into a trailer 1.5x=191,250,000X = 127,500,000 (Answer)
How much revenue (missing revenue) does Biovail get from a single pill? Biovail + 400% (Distributor mark up) + 35% (wholesaler margin) = $2.83 (Refer page 3, paragraph 3)
Supply chain: Biovail →Distributor →Wholesaler→ Retailer 2.83 / 135%
135 % (35% + 100%)
2.10 / 500%
500% (400% + 100%)
The total value of tablet in one fully loaded trailer 127,500,000 x 0.42= $53,550,000 One truck can carry $10 million worth of Wellbutrin XL tablet product.
2) How should the company recognize revenue based upon the two possible...
References: 1) Carton, B. (2010, September). Flashback: Accounting for Biovail 's Truck Accident. Compliance Week .
2) Anderson, J. (2006, February). Claiming Stock Manipulation, Biovail Sues Hedge Fund. The New York Times. Retrieved from http://www.nytimes.com
3) Barr, A. (2006, February). Biovail sues SAC Capital, 21 others. Market Watch. Retrieve from http://www.marketwatch.com
4) Acharya, M. (2014, April). Biovail, CEO mislead investors, OSC says. The Star. Retrieve from http://www.thestar.com
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