Biovail Case Study

BIOVAIL CASE STUDY

1. How many truckloads of product are actually required to carry $10 million of product? Show your calculations.

Based on the calculation, one truck would be sufficient to transport $10m worth of Wellbutrin XL (at $0.37 revenue per pill). Also, it appears that Biovail was overstating the quantities and potential revenue impact the accident might have had.

2. How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Explain.

According to the SEC’s Staff Accounting Bulleting 104, revenue should be recognized when the following criteria have been met:

a) there is persuasive evidence that a sales agreement exists;

b) delivery has occurred or services have been rendered;

c) the seller’s price is fixed or determinable; and

d) collectability is reasonably assured.

The text gives enough evidence that would satisfy criteria a), c), & d). There seems to be a sales agreement or at least a Purchase Order. There is a defined price for the distributor ($0.37) per Wellbutrin tablet, and based on comments in the text, the distributor was a major international pharmaceutical company, so collectability also seems reasonably assured. The issue lies within b), i.e. that delivery for the product had occurred. Biovail’s CFO states that the title had already passed on to the distributor (FOB shipping point). This is contradicted by the fact that a previous email sent to the distributor showed an agreement between the firms that title to, and risk of loss would only have passed to the distributor when the product was delivered to their facility (FOB destination). Based on this, revenue should not have been recognized in that quarter. Also, assuming that Biovail is the beneficiary of the insurance, it can be assumed that title had not yet passed and revenue should not have been recognized until October.

3. How does the accident affect the third-quarter revenues under the different FOB contract...