Question

1) A biotech firm’s legal department costs are significant, employing 80 lawyers. The firm’s main business focus is developing new drugs for human consumption. Upon developing a new product patents are required. Contracts must be created for each product between three customer divisions: private hospitals (60% of sales), public hospitals (30% of sales) and direct to doctors (10% of sales) to ensure proper recognition of revenues from each product. Also, the firm must be prepared to represent litigate future legal cases should a drug therapy have a lawsuit brought against it for harm to patients.

Each lawyer earns $100,000 per year in total compensation.

40 lawyers work in the patent division. 30 work in the contract design division with 12 each supporting the two hospital divisions and 6 support the doctor direct sales. 10 work in the litigation department supporting equally all divisions.

Additional legal costs to be accounted for:

Patent costs: $1,000,000 per new drug plus labor above allocated based on sales.

Costs to design contracts: $10,000 per private (300) & public hospital (100).

$1,000 per doctor (2000) using new drugs.

Costs to litigate cases: Labor above plus $3,000,000 annually

(based on 2400 customers noted in design above)

Based on above information allocate labor, development, design and litigation costs to the private, public and doctor divisions. Note total legal costs are $18,000,000.

Answer 1

Allocation of Cost sheet as under:

Nature of Legal cost (Development, Design & Litigation)	Legal Cost in $	Basis of Allocation	Private Hospitals (60% of Sales)	Public Hospitals (30% of Sales)	Direct to Doctors (10% of Sales)
Development Cost
Patent Cost	1,000,000.00	On the basis of sales (60%:30%:10%)	600,000.00	300,000.00	100,000.00
Lawyer Cost (40 Lawyer @ $ 100,000 each)	4,000,000.00	On the basis of sales (60%:30%:10%)	2,400,000.00	1,200,000.00	400,000.00
Total - A	5,000,000.00		3,000,000.00	1,500,000.00	500,000.00
Cost of Design Contract
Private Hospitals (300 Hospital @ $ 10,000 Each)	3,000,000.00	On Actual basis	3,000,000.00
Public Hospitals (100 Hospital @ $ 10,000 Each)	1,000,000.00	On Actual basis		1,000,000.00
Direct to Doctors (2000 Doctor @ $ 1,000 Each)	2,000,000.00	On Actual basis			2,000,000.00
Lawyer Cost - Private Hospital (12 Lawyer @ $ 100,000 each)	1,200,000.00	On Actual basis	1,200,000.00
Lawyer Cost - Public Hospital (12 Lawyer @ $ 100,000 each)	1,200,000.00	On Actual basis		1,200,000.00
Lawyer Cost - Direct to Doctors (6 Lawyer @ $ 100,000 each)	600,000.00	On Actual basis			600,000.00
Total - B	9,000,000.00		4,200,000.00	2,200,000.00	2,600,000.00
Litigation Costs
Cost of Litigation	3,000,000.00	On Number of Customers (300:100:2000)*	375,000.00	125,000.00	2,500,000.00
Lawyer Cost (10 Lawyer @ $ 100,000 each)	1,000,000.00	On Equal Basis (1:1:1)	333,333.33	333,333.33	333,333.33
Total - C	4,000,000.00		708,333.33	458,333.33	2,833,333.33
Sub Total (A+B+C)	18,000,000.00		7,908,333.33	4,158,333.33	5,933,333.33

Cost of Litigation is based on number of customers = 300 Private Hospital + 100 Public Hospital + 2000 direct Doctors = 2400 (Number of customers)