CaseAnalysis WorldWideDrugs
The breakeven calculation
In the World Wide Drugs case, the given figures are summarized as follow:
Monthly Sales: $96/ monthly treatment, of which $66 is paid to WWD and $30 is paid to the doctor
Variable Cost: $26.40/ treatment, of which $9.60 is for the potential product litigation costs.
Fixed Cost: $24,000,000
The breakeven point (in units of monthly treatments) when WWD’s variable costs include $9.60 estimate is calculated as follow (all answers are rounded to 2 decimal places):
0 = $66.00x – $26.40x - $24,000,000.00
$39.60x = $24,000,000.00 x = 606,060.61
Therefore, WWD has to sell 606,061 treatments in order to break even when the litigation costs are included.
The breakeven point (in units of monthly treatments) when WWD’s variable costs exclude the $9.60 estimate is calculated as follow (all answers are rounded to 2 decimal places):
*Variable costs exclude potential product litigation costs: $26.40 - $9.60 = $16.80
0 = $66.00x - $16.80x - $24,000,000.00
$49.20x = $24,000,000.00 x = 487,804.85
Therefore, WWD has to sell 487,805 treatments in order to break even when litigation costs are excluded.
Whether the $9.60 estimate should be included in the report
It is unethical for Diba to exclude the $9.60 estimate in his written report to the executive committee of WWD. The written report should include all information that would affect the executive committee’s decisions. If some of the executives are absent from the meeting, they would not be aware of the extra cost. All the executives have rights to understand both the ROI and risks of the investments before making any decisions. Since the breakeven units have a huge difference of 118,255, the executives will be misled if the litigation cost is eliminated from the report.
In response to the situation
I have developed three hypothesis in order to response to Kelly’s decision to make the Vital Hair presentation on her own. If I was Diba, I would either confront her, send the complete report ($9.60
In the World Wide Drugs case, the given figures are summarized as follow:
Monthly Sales: $96/ monthly treatment, of which $66 is paid to WWD and $30 is paid to the doctor
Variable Cost: $26.40/ treatment, of which $9.60 is for the potential product litigation costs.
Fixed Cost: $24,000,000
The breakeven point (in units of monthly treatments) when WWD’s variable costs include $9.60 estimate is calculated as follow (all answers are rounded to 2 decimal places):
0 = $66.00x – $26.40x - $24,000,000.00
$39.60x = $24,000,000.00 x = 606,060.61
Therefore, WWD has to sell 606,061 treatments in order to break even when the litigation costs are included.
The breakeven point (in units of monthly treatments) when WWD’s variable costs exclude the $9.60 estimate is calculated as follow (all answers are rounded to 2 decimal places):
*Variable costs exclude potential product litigation costs: $26.40 - $9.60 = $16.80
0 = $66.00x - $16.80x - $24,000,000.00
$49.20x = $24,000,000.00 x = 487,804.85
Therefore, WWD has to sell 487,805 treatments in order to break even when litigation costs are excluded.
Whether the $9.60 estimate should be included in the report
It is unethical for Diba to exclude the $9.60 estimate in his written report to the executive committee of WWD. The written report should include all information that would affect the executive committee’s decisions. If some of the executives are absent from the meeting, they would not be aware of the extra cost. All the executives have rights to understand both the ROI and risks of the investments before making any decisions. Since the breakeven units have a huge difference of 118,255, the executives will be misled if the litigation cost is eliminated from the report.
In response to the situation
I have developed three hypothesis in order to response to Kelly’s decision to make the Vital Hair presentation on her own. If I was Diba, I would either confront her, send the complete report ($9.60