1.4 ETHICS CASE: MANAGING COSTSAdapted from Textbook Case 2-32High drug costs are often in the news. Consumer groups contend that the pricing for some drugs(e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that thecost to manufacture each dose is so low. They talk of price gouging and excessive profits.Pharmaceutical companies defend the prices charged on the basis of research and developmentcosts. They state that the percentage of successful drugs emanating from research efforts is lowand that it may take years before a promising drug passes through Food and DrugAdministration (FDA) requirements and becomes available for sale.Exhibit 2.7Understanding Different Cost DefinitionsVALUE CHAIN COMPONENTCOST EXAMPLESMANAGERIAL OBJECTIVEExternal Financial Reporting• Inventory, cost of goods sold, and gross margin• Operating expenses (aggregated costs)Internal Strategic Analyses• New product development• Pricing decisions• Product mix decisions• Customer profitability decisionsSpecial-order tactical decisionsPeriodRESEARCHAND DESIGNUpstream CostsStudy emerging healthtrends• Scout movie filminglocationsXXPeriod• Brainstorm self-driving car Write television showcapabilitiesscriptDEVELOPMENTUnderstanding Different Cost DefinitionsEngineer aircraft todesigned specifications.• Create prototype of newproduct designXXXXXProductPRODUCTIONDetermine cost toproduce products• Assess prime costs: Directmaterials and direct labor• Assess conversion costs:Direct labor and overheadDownstream CostsPeriodMARKETINGAND DISTRIBUTIONLease warehouse forfinished products• Ship sold items tocustomersShow the privacy report for this site• Demonstrate lawn andgardening servicesXPeriodCUSTOMERSERVICEInvestigate customerquality complaintsPerform warrantyinspections and repairs.Replace faulty fiber opticcablesXRequired:1. Which cost definition from Exhibit 2.7 is being used by the consumer groups? Thepharmaceutical companies? What items are included in the cost figures cited by consumergroups? What items are the pharmaceutical companies including in their discussion of productcost? Which costs do you think should be included when comparing the cost of a drug with itsprice?2. Suppose that you are the accountant for the pharmaceutical company who is charged with theresponsibility for compiling costs associated with your newest drug. The cost figures will be usedin pricing and to determine profitability of the drug. What costs do you think you wouldinclude? Explain why you would include or not include costs.3. Explain how the IMA Statement of Ethical Professional Practice can have a bearing on yourchoice? Discuss.

Understanding the different cost categories is essential for businesses to accurately determine…

High drug costs are often in the news. Consumer groups contend that the pricing for some drugs (e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the cost to manufacture each dose is so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the prices charged on the basis of research and development costs. They state that the percentage of successful drugs emanating from research efforts is low and that it may take years before a promising drug passes through Food and Drug Administration (FDA) requirements and becomes available for sale.

High drug costs are often in the news. Consumer groups contend that the pricing for some drugs (e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the cost to manufacture each dose is so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the prices charged on the basis of research and development costs. They state that the percentage of successful drugs emanating from research efforts is low and that it may take years before a promising drug passes through Food and Drug Administration (FDA) requirements and becomes available for sale.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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