World Wide Drugs

Introduction

The purpose of this report is to identify the best course of action regarding the new “Vital Hair” product. The report provides background information relevant to the analysis, alternatives available to World Wide Drugs (WWD), and makes recommendations. All relevant calculations can be found in the Appendix.

Background Information

World Wide Drugs manufactures body and health products in a highly competitive environment. The Body Products Division, led by president Cheryl Kelly and controller Ahmed Diba, have proposed a new product called “Vital Hair”. WWD has accepted the proposal Kelly delivered to begin research and development for “Vital Hair”.

Customers will pay $96 for each monthly treatment; WWD will receive $66 of that money. Fixed costs were stated to be $24,000,000 and variable costs were stated to be $16.80 per treatment (see the Appendix for breakeven calculations).

Upon further investigation, it was found an additional $9.60 for potential product litigation costs was excluded from the variable cost calculation. Variable costs would increase to $26.40, leading to a need to sell more “Vital Hair” treatments to breakeven.

This exclusion creates two major issues for WWD: a project cost issue and an ethical issue. It must be determined whether the project is worth continuing after discovering this excluded cost.

Alternatives

Three alternatives have been designed for this situation:

Continue on with the “Vital Hair” project and ignoring the excluded litigation cost.

Continue on with the “Vital Hair” project, but with a revised proposal including the litigation cost.

Cancel the project entirely.

Analysis of Alternatives

Alternative #1 – Continue the project and ignore the litigation cost.

Qualitative Analysis

Pros of selecting this alternative:

The project would move forward.

Cons of selecting this alternative:

It is unethical to exclude a cost to make a proposal look better. This violates competence standards.

Ignoring these costs shows a lack of integrity.

The full disclosure principle is ignored; every relevant piece of information must be disclosed.

Quantitative Analysis

If the litigation cost is ignored, the breakeven cost is dramatically lower at $487,805 (see Exhibit 1). There is an obvious financial benefit