NEW Q1. Mark Johnson is controller for a Pharmaceutical company. During the company's midyear review, Johnson notes that the company's Research and Development expenditures are already $3.0 billion, nearly 40% above the midyear target.In a meeting with the CFO later that day, Johnsons delivers the bad news to the CFO, Pauline Stewart. Stewart was shocked and outraged that the R&D spending had gotten out of control. Stewart wasn't any more understanding when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lucexx, which was expected to go to market next year. The new drug would result in large profits for the company, if the product could be approved by year-end. Johnson came up with the following idea for making the third-quarter budgeted targets:Stop all research and development expense on the drug Lucexx until after year-end. This change would delay the drug going to market by at least 6 months. It is certain that in the meantime a competitor could make it to market with a similar drug. The results on the company of this action is: A.An increase in both short-term and long-term profits B.An increase in short-term profits and a decrease in long-term profits C.A decrease in short-term profits and an increase in long term profits D.A decrease in both short-term and long-term profits
NEW Q1. Mark Johnson is controller for a Pharmaceutical company. During the company's midyear review, Johnson notes that the company's Research and Development expenditures are already $3.0 billion, nearly 40% above the midyear target.In a meeting with the CFO later that day, Johnsons delivers the bad news to the CFO, Pauline Stewart. Stewart was shocked and outraged that the R&D spending had gotten out of control. Stewart wasn't any more understanding when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lucexx, which was expected to go to market next year. The new drug would result in large profits for the company, if the product could be approved by year-end. Johnson came up with the following idea for making the third-quarter budgeted targets:Stop all research and development expense on the drug Lucexx until after year-end. This change would delay the drug going to market by at least 6 months. It is certain that in the meantime a competitor could make it to market with a similar drug. The results on the company of this action is: A.An increase in both short-term and long-term profits B.An increase in short-term profits and a decrease in long-term profits C.A decrease in short-term profits and an increase in long term profits D.A decrease in both short-term and long-term profits
Chapter15: Managing Short-term Assets
Section: Chapter Questions
Problem 13PROB
Related questions
Concept explainers
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
Transcribed Image Text:NEW
Q1. Mark Johnson is controller for a Pharmaceutical company. During the
company's midyear review, Johnson notes that the company's Research
and Development expenditures are already $3.0 billion, nearly 40%
above the midyear target.In a meeting with the CFO later that day,
Johnsons delivers the bad news to the CFO, Pauline Stewart. Stewart
was shocked and outraged that the R&D spending had gotten out of
control. Stewart wasn't any more understanding when Johnson revealed
that the excess cost was entirely related to research and development of
a new drug, Lucexx, which was expected to go to market next year. The
new drug would result in large profits for the company, if the product
could be approved by year-end. Johnson came up with the following idea
for making the third-quarter budgeted targets:Stop all research and
development expense on the drug Lucexx until after year-end. This
change would delay the drug going to market by at least 6 months. It is
certain that in the meantime a competitor could make it to market with a
similar drug. The results on the company of this action is:
A.An increase in both short-term and long-term profits
B.An increase in short-term profits and a decrease in long-term profits
C.A decrease in short-term profits and an increase in long term profits
D.A decrease in both short-term and long-term profits
Transcribed Image Text:NEW
Q2. Mark Johnson is controller for a Pharmaceutical company. During the
company's midyear review, Johnson notes that the company's R&D
expenditures are already $3.0 billion, nearly 40% above the midyear
target. In a meeting with the CFO later that day, Johnsons delivers the
bad news to the CFO, Pauline Stewart. Stewart was shocked and
outraged that the R&D spending had gotten out of control. Stewart wasn't
any more understanding when Johnson revealed that the excess cost
was entirely related to research and development of a new drug, Lucexx,
which was expected to go to market next year. The new drug would
result in large profits for the company, if the product could be approved
by year-end. Johnson came up with the following ideas for making the
third-quarter budgeted targets:Sell off rights to the drug, Martek. The
company had not planned on doing this because, under current market
conditions, it would get less than fair value. It would, however, result in a
onetime revenue that could offset the budget shortfall. The patent on
Martek is about to expire, after which any competitor can make the drug.
On balance, the results on the company of this action are:
A.An overall positive effect on short-term profits, while not affecting expected long-term profits
B.An overall negative effect on short-term profits, while not affecting expected long-term profits
OC.An overall positive effect on short-term profits, while diminishing expected long-term profits
D.No predictable effect on short-term profits
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning