Biovail Corporation: Revenue Recognition and FOB Sales Accounting Harvard Case Solution & Analysis

Biovail Corporation: Revenue Recognition and FOB Sales Accounting Case Solution

Introduction

Biovail Corporation has progressed with the clinical effectiveness of its medicines. It has been one of the largest pharmaceutical companies in Canada. It has competency in the market that it has developed large-scale of the economy.  Biovail has made advancement to the drugs. Its area of concern was pain management, cardiovascular disease and nervous system disorders.

            Biovail Corporation appeared to a great loss due to the truck accident of the company in 2003. The company had to miss the quarterly first time in the second quarter of 2003. The company appeared to a great loss since the truck accident has made the company to suffer from a huge amount of $10 to $20 million. The company faced a conflict of revenue recognition. It was the estimation by the company that the truck loaded with the drugs had a loss of approximately $10 million to $20 million. However, the actual value of merchandise in the truck was about $ 5 million.

Question 1

How many truckloads of products are actually required to carry $ 10 million   of product?

The company is considered as a largest trading pharmaceutical company of Canada but in recent year company missed its financial targets due to the shipment loss in a truck accident. The management of the company is considering identifying the number of truckloads of products to carry 10 million of products.

For that purpose first of all total weigh of the products are identified. The number of gallons in a truck are 64 the space of 0.5 cm tablet and 1cm of packaging. The interior dimension of the truck is also given which is 17m*4.5m*2.5m. With the help of available data total weight of the products are identified and then total gallons in a truck are also identified. By multiplying the total gallons volume with the whole sale price, price per truck identified and then this whole sale price per truck used to identify the number of trucks such as target amount of 10 million divided by the price per truck which provides 14.59 trucks that are required to carry $10 million of products. (For calculations please refer to the excel sheet)

Data    
Number of Wellbutrin bulk tablets on truck 64 (Gallon drums)
300 mg Wellbutrin tablet 0.5 cm
Additional package space 1 cm
Wholesale acquisition price 2.83 (Per tablet)
Interior dimensions of a typical 18-wheeler 17m*4.5m*2.5m
Products under pallet in a truck 8 (Pallets)
Total pounds 11690
Product size in a truck 1.5 cm
Gallon size in cubic volume 3785.41
Total gallons in volume per truck 242266.24
Whole sale price involved per truck                   685,613
Target products             10,000,000
Number of trucks to load 10 million products 14.59

Question 2

FOB structure in the company

The rule of GAAP stated the four conditions that should be met to identify the revenue. One perspective in accordance with the GAAP rule is the provision of the arrangement exists in the case. Although it has not been clearly mentioned in the case, however, the involvement of distributor has evident that there must have a bill transaction, purchase order or invoice order in order to assure the sale of the company. The second rule of GAAP has defined the price of the seller at the cost of the buyer and it was addressed in the case study and its evidence has shown in this aspect.

The third rule of GAAP has identified in the study with the evidence of collection that has assured by the contracting parties. Hence, the distributor and Biovail had the ongoing relationship. The fourth condition has met the GAAP rule that the delivery or services should have rendered. In this case, major conflicts have identified the FOB conditions. These conditions are discussed below:.....................

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