1.How many truckloads of product are actually required to carry $10million of product? Show your calculations
0.028 Truckloads are required. This is derived from $10,000,000/$2.83 price per tablet, giving approximately 3,533,569 tablets. The dimensions of the truckload include 17 mx4.5 mx2.5 m= 191.25 m^3, or 191,250,000 cm^3. The volume each tablet takes up is 1.5 cm^3, so a truckload can fit 191,250,000 cm^3/1.5 cm^3 = 127,500,000. 3,533,569/127,500,000=.028 truckloads.
2.How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Why?
If the shipping terms are FOB Shipping Point, the company recognizes revenue for the products shipped as soon as the products ship to the customer. This is because, per the contract, the title of the product shifts to the customer at shipping point, and the work necessary has been completed by the seller.
If the shipping terms are FOB Destination, the company does not recognize revenue until the products shipped arrive at the customer site. This is because, per the contract, the title of the product does not shift to the customer until it is at the customer site in their ownership. The revenue cannot be recognized until delivery has occurred.
3.How does the accident affect the stated revenues under the different FOB contract structures? Explain your reasoning.
If terms are FOB Shipping point, the accident does not affect the revenues for Biovail. The title of goods shifted to the distributor at the point of shipment, so Biovail has completed the required work per the contract, and can recognize revenue. This is assuming that the agreed upon amount was shipped, which can be proven by a packing slip or any other shipping documentation. In a circumstance like this, Biovail will likely undergo an audit with extreme scrutiny to ensure all terms of the contract were fully carried out. However, if Mr. Crombie (Biovail CFO) was mistaken and the contract with the distributor was FOB destination, then revenue should not have been recognized because the product never made it to the distributor’s facility. This would require a restatement of earnings because the title of goods was still with Biovail.
4.If you were Mr. Maris, in making the stock recommendation choice (signing off on “Sell” versus some other recommendation), other than the accounting issue above, what are the key issues and tradeoffs to consider, especially in light of what had happened to your predecessor Mr. Treppel?
Key issues to considering in making his stock recommendation include Biovail’s treatment of Treppel’s recommendations. Since Biovail had Treppel investigated by the NY State Attorney General’s office, Maris will want to ensure his recommendation has factual backing. The predicament that he’s currently faced with is whether to protect the interest of his own career (by not listing Biovail as a “sell”) versus protecting the interest of the investors that follow him.
Another key issue includes Maris’ belief that Biovail may be participating in “channel stuffing.” If this is the case, he will want to research how Biovail’s customers are reacting to this: Are they typically returning the product? Are they accepting the additional products? Providing transparency on this issue will help to clarify concerns with revenue recognition. Finally, Maris should consider if the contract change from FOB Shipping Point to FOB Destination was actually made and signed. If there was not an actual revision to the contract, other than the call and email, the contract terms may still be legally FOB Shipping Point.
