Question

Body Products Division of World Wide Drugs Ahmed Diba is the controller of the Body Products Division of World Wide Drugs (WWD). It is located in Winnipeg, which is the headquarters of WWD. Diba is helping develop a proposal for a new product to be called Vital Hair. This product is a cream to be rubbed on the scalp to restore hair growth. Cheryl Kelly, president of the division and Diba are scheduled to make a presentation to the WWD executive committee on the expected profitability of Vital Hair. The fixed costs associated with the development, production and marketing of Vital Hair are $24,000,000. Each customer will pay a doctor $96 per monthly treatment, of which $66.00 is paid to WWD. Diba estimates WWD’s variable costs per treatment to be $26.40. Included in this $26.40 is $9.60 for potential product litigation costs. Kelly is livid at Diba for including the $9.60 estimate. She argues that it is imperative to get the R and D funds approved (and quickly) and that any number that increases the breakeven point reduces the likelihood of the Vital Hair project being approved. She notes that WWD has had few successful lawsuits against it, in contrast to some recent “horrendous” experiences of competitors with breast implant products. Moreover, she is furious that Diba put the $9.60 amount in writing. “How do we know there will be any litigation problem?” She suggests Diba redo the report excluding the $9.60 litigation risk cost estimate. “Put it on the chalkboard in the executive committee room, if you insist, but don’t put it in the report sent to the committee before the meeting. You can personally raise the issue at the executive committee meeting and have a full and frank discussion.” Diba takes Kelly’s “advice”. He reports a variable cost of $16.80 per treatment in the proposal. Although he feels uneasy about this, he is comforted by the fact that he will flag the $9.60 amount to the executive committee meeting in his forthcoming oral presentation. One month later, Kelly walks into Diba’s office. She is in a buoyant mood and announces she has just come back from an executive committee meeting that approved the Vital Hair product proposal. Diba asks why he was not invited to the meeting. Kelly says the meeting was held in Toronto, and she decided to save the division money by going alone. She then says to Diba that it “was now time to get behind the new venture and help make it the success the committee and her team members believe it will be.” Required 1 – What is the breakeven point (in units of monthly treatments) when WWD’s variable costs (a) include the $9.60 estimate? (b) exclude the $9.60 estimate for potential product litigation costs? 2 – Should Diba have excluded the $9.60 estimate in his report to the executive committee of WWD? Explain your answer. 3 – If you were Diba, what would you do in response to Kelly’s decision to make the Vital Hair presentation on her own? Explain in paragraphs.

Answer 1

1.a) break even point when the variable cost includes the $9.60 estimate

= Fixed Cost/(selling price-variable cost)

=$24,000,000/(66-26.4)

=606,061 units

b)

break even point when the variable cost includes the $9.60 estimate

= Fixed Cost/(selling price-variable cost)

=24,000,000/(66-16.8)

=487,805units.

2. No Diba should not have excluded the $9.6 estimate in his report. The report without the litigation cost means its approved and verified that there will be no chances of litigation, which is unlikely in Skin care industry. He shouldnot have fallen for the anger of the vice president and taken his stand. Instaed of taking past expreiences of the lawsuits whre WWD emerged as a winner , he should have concluded that there might be cases of litigation against the company.

Although he thought that he will convey the litigation cost orally , but a written and documented proff is much more soughted than oral communication. This act of his might be a treat for him in future.

3. If it was me inplace of Diba i would have told her that Vital Hair presentaion was a part of team work, where my presence is valuable as much as Kellys. Also when Kelly was aware of it before hand that I was about to share my thought regarding the litigation reserve then it was unprofessional on her part to exclude myself from the trip. I would have also her that any future consequences arising because of the litigation will not be my responsibility.

Moreover i will definitely mention Kelly that for a reputed company like WWD could have easily borne the expenses of one person travelling to Toronto for an important meeting like this.