Peer & Pear Limited is an American pharmaceutical manufacturer of pain relief drugs founded in 1886. Its common stock is a component of the Dew Johns Industrial Average and the company is listed among the Fortune 500.
Despite the small size of this company, it consistently ranks at the top of Harris Interactive?s National Corporate Reputation Survey, ranking as the World?s most respected company by Barron?s Magazine and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S State Department for its funding of the international education programs. A suit brought by the united states department of justice in 2010, however, alleges that, from 1999 to 2004, the company illegally marketed drugs to Omnicare, a pharmacy the dispenses the drugs in nursing homes. However Peer & Pear responded that the payments were lawful and appropriate and won the suit.
The company is located in New Jersey, USA. The consumer division is located in Peterborough, United Kingdom. Lately, the financial performance of the UK consumer division has not been satisfactory. Hence management as asked the chief management accountant to have a closer look at the UK division.
The budgeted data for the UK division for the coming year is as follow:
Product Triptans Motilium Migraleve
Sales(in units) 150,000 180,000 120,000
? ? ?
UK sales 2,250,000 2,160,000 1,320,000
Coating materials 250,000 190,000 110,000
Binder materials 500,000 530,000 250,000
Salaries & wages 600,000 480,000 240,000
Total overhead cost 975,000 900,000 540,000
Profit/Loss:— (75,000) 60,000 180,000
Based on the figures above, Peer & Pear has started a review of the profitability line of its product portfolio.
Peer & Pear is concerned about the loss on the Triptans line and had devised a strategy of ceasing production of this drug and switching the spare capacity of 150,000 unites to the production of Migraleve drug.
However by increasing the production of Migraleve, this would mean that the fixed labour cost associated with Migraleve drag would double, the variable labour cost would rise by 30 per cent and its selling price would have to be decreased by ? 2.25 in order to achieve the increased sales.
Assuming all production is sold, ceasing production of Triptans would eliminate the fixed labour charge associated with it and half of the fixed administration overhead apportioned to Triptan drug.
1. It should be noted that 25 per cent of the salaries and wages cost for each drug is fixed in nature.
2. The fixed administration overheads of ? 1，350，000 in total have been apportioned to each product on the basis of units sold and are included in the overhead costs above, all other overhead costs are variable in nature.
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