The Revenue Recognition and FOB Sales Accounting Case Study for Biovail Corporation have been published in the Harvard Business Review. The Biovail Corporation Revenue Recognition and FOB Sales Accounting Case, like all Harvard business case studies, is researched and written in a way that enables the user to identify an actual problem and find an appropriate solution.
The research study will aid readers and students in gaining a more comprehensive and precise understanding of the business world and its dynamics, similar to other HBR case studies. The Revenue Recognition and FOB Sales Accounting Case for Biovail Corporation are built on an originally consistent and strategic issue that the firm is facing and that needs to be diplomatically resolved to allow advancement and keep the company competitive.
The supply chain of Biovail manufacturers includes:
Q1. i) Manufacturers’ revenue per Pill
Retailer Wholesaler Distributor
Cost = 2.83
Margin = (Price–Cost)
Margin = 0.35
Price = $2.83
Cost = Price (1 – Margin)
Cost = $1.84
Markup = (Price–Cost)
Markup = 4
Prices = $0.184
Cost = Price
Cost = (1.84)
Cost = $0.37
Biovail = $0.3679 revenue per Pill pills = $10
ii) Pill equating to $10millions in revenue
Pills = $10
Pills = 27,027,027.03
27,027,028 pills to equate $10 million in revenue
iii) The volume of $10m worth of pills
Pill = 1.5 cm3
Volume = 27,027,028 × 1.5 cm3
Volume = 40540542 cm3
1 liter = 1000 cm3
Volume = 40540542
Volume = 40,540.54
1 Gallon = 3.7854 Litres
Gallons = 40,540.54
Gallons = 10,709.71
1 drum = 64 gallons
Drum = 10,709.71
Drum = 167.34
The volume of $10 million worth of pills is 167.34 drums.
iv) Truckloads are required to carry $10 million worth of pills
One 18-wheeler Truck = (17m (100) × 4.5m (100) × 2.5m (100))
One 18-wheeler Truck = 191,250,000 cm3
Truckloads required to carry $10 million worth of pills are:
Truckload = 40540542 cm3
Truckload = 0.211977
This shows that for carrying $10 million worth of pills, one truck is more than enough.
Q2. Revenue recognition based on each of the two FOB contract structure is used as follows:
- FOB shipping point
- FOB destination
FOB shipment is one feasible FOB (freight on board) option. This form of transaction between both the vendor (Biovail) and the buyers (distributor) suggests that the liability for the products passes from the vendor to the purchaser at the moment of dispatching for shipment. At this time, ownership of the items passes from the buyer to the seller. The corporation has now been absolved of any responsibility for the sale.
One could claim that the four requirements outlined by US GAAP have been satisfied at this time. As a result, Biovail can start making money as quickly even as products are delivered. According to the FOB shipping contract, Biovail will recognize revenue once the Wellbutrin XL left the manufacturing facility of Biovail in Manitoba, Canada, on September 30, 2003. In this situation, the FOB destination would be another potential FOB.
In this form of FOB, after the products have been dispatched for delivery, the seller still has responsibility (and consequent risk) for them. When the products arrive at their intended location, ownership of the commodities passes to the buyer. The income can only be recognized when the products are delivered at their destination because the delivery of the commodities is not completed until they get there.
Q3. The accident affecting third-quarter revenue under the two possible FOB contract structures
Given the evidence presented in this case, Biovail ought to have recognized revenue in accordance with the FOB Destination structure. Nevertheless, Biovail reported revenue as if it were doing so under FOB shipping, possibly in an effort to gush about the amount of money it had made during the quarter. According to GAAP, revenue on the sale of a good like Wellbutrin XL may be recorded once, among many other things, an item has been delivered by the seller to the customer.
According to the contract Biovail had with the distributors, all Wellbutrin XL supplies were made FOB Destination. The delivery term FOB Destination denotes that delivery only takes place and revenue can only be realized once the product arrives at the buyer’s facility. Additionally, the truck incident wouldn’t have had an effect on Biovail’s third-quarter quarterly earnings if the business had recorded the sales revenues at the time the product left Biovail’s plant.
The truck accident would not have had any effect on Biovail’s third-quarter quarterly earnings since the titles to the product – as well as the risk involved with the incident -would have transferred to the Distributors as soon even as the truck departed Biovail’s Manitoba factory,” according to the SEC. Therefore, Biovail’s third-quarter financial performance is unlikely to have been harmed by the truck accident.
Q4. David Maris should act
Although the treatment of stock analysts by Biovail raises some concerns, I wouldn’t let it worry me too much. As long as I’m performing my job properly and ethically, I wouldn’t worry about them trying to harm my career if I didn’t even cover their stock positively. I would report them honestly and ethically.