Case Study: Biovail Corporation: Revenue Recognition and Fob Sales Accounting

Case Study: Biovail Corporation: Revenue Recognition and FOB Sales Accounting

Question 1: How many truckloads of product are actually required to carry $10 million of product? Show your calculations.

Answer: 1) We should calculate the volume of each 300mg Wellbutrin XL tablet with packing space:

                  0.5cm3 + 1 cm3 (packing space) = 1.5 cm3

2) We should calculate the volume of a typical 18-wheeler trailer:

 17m3 * 4.5m3 * 2.5m3 = 1700 cm3 * 450 cm3 * 250 cm3= 191,250,000 cm3

3) So we could calculate a typical 18-wheeler trailer could contain how many 300mg Wellbutrin XL tablet with packing space:

191,250,000 cm3 / 1.5 cm3 = 127,500,000

4) As we know the supply chain relationship as below:

So the sales price at Biovail is $ 0.5241 each. There are 127,500,000 products, so the total revenue of Biovail in that truck is $ 0.5241 * 127,500,000 = $66,822,750. One truck could definitely carry $10 million of product.

Question 2: How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? why?

Answer: U.S. GAAP required that revenue must be earned and realized or realizable in order for it to be recognized. SAB 101 stated that these conditions would generally be satisfied when the following four criteria were met:

1. Persuasive evidence of an arrangement exists:

The case did not provide the evidence of an arrangement but it seems that Biovail has an ongoing relationship with the Distributor, which is the North Carolina facility of one of Biovail’s strategic partners – a major international pharmaceutical company that distributed the product.