Biovail Case Answers

BIOVAIL CORPORATION

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

Given:

Truck trailer volume = 17m x 4.5m x 2.5m = 1,700cm x 450cm x 250cm = 191,250,000

Tablet volume = (1.0cm3 packaging volume) + (0.5cm3 tablet volume) = 1.5cm3

We can calculate the number of tablets that can fit on one truck (assuming no space between each box):

Tablets per truck=Truck volumeTablet volume=191,250,000cm31.5cm3=127,500,000 tablets

Given:

Markup=Price-CostCost→Price=Cost×(1+Markup)

Margin=Price-CostPrice→Price=Cost(1-Margin)

Combining the two given formulas above, we can derive a formula for the cost of a single tablet as follows:

Tablet price=$2.83=Cost×1+400% Markup(1-35% Margin)

Knowing price, markup, and margin, we can solve for cost:

∴Cost of tablet=(Tablet price)×(1-35% margin)1+400% markup=2.83×0.655≈$0.37 per tablet

Now that we have the cost, we can calculate the value of one truck’s worth of product as:

Total value on 1 truck=127,500,000×$0.37=$47,175,000

$10M as % of 1 truck =$10,000,000$47,175,000=21.2%

As shown above, 1 truckload can carry (more than) $10M of product.

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

FOB Shipping Point: In the FOB Shipping Point contract structure, Biovail would recognize revenue once the product departs their shipping center, since ownership and responsibility transfers from Biovail to the distributor at that point in time.

FOB Destination: In the FOB Destination contract structure, Biovail would recognize revenue once the pills were delivered to and received by the distributor shipment facility since that is when ownership and responsibility transfers from Biovail to the distributor.

(3) How does the accident affect the third-quarter revenues under the different FOB contract structures? Explain your reasoning.

FOB...