E1-2B The following information was taken from the 2010 financial statements of

Question

E1-2B The following information was taken from the 2010 financial statements of phar- maceutical giant Merck and Co. All dollar amounts are in millions. Retained earnings, January 1, 2010 $41,405 Materials and production expense 18,396 Marketing and administrative expense 13,245 Dividends 4,730 Sales revenue 45,987 Research and development expense 10,991 Tax expense 671 Other expense 1,823 Instructions (a) After analyzing the data, prepare an income statement and a retained earnings state- ment for the year ending December 31, 2010. (b) Suppose that Merck decided to reduce its research and development expense by 50%. What would be the short-term implications? What would be the long-term implica- tions? How do you think the stock market would react?

Explanation / Answer

(a)

(b)

(i)Suppose that R& D expenses are reduced by 50 % then its profit has been increased by 5,495.50 $ making it 6,356.50.( Tax Implication is not considered for want of information)

(ii) In long term its profit might be decreased due to old products and lack of innovation

(iii) Stock Market would go up due to increased profit.

phar- maceutical giant Merck and Co. Statement of Income For Yr. Ended Dec 31st,2010 Particulars Amount $ (in millions) Particulars Amount $ (in millions) To Material & production Expenses             18,396 By Sales Revenue             45,987 To Gross Profit C/d             27,591             45,987             45,987 To R&D expenses             10,991 By Gross Profit B/f             27,591 To Marketing & administrative Exp             13,245 To Other Exp               1,823 To Net Profit C/d               1,532             27,591             27,591 Net Profit               1,532 Less: Tax Expenses                 -671 Net Profit After Tax                   861 Statement of Retained Earnings For Yr. Ended Dec 31st,2010 Amount $ (in millions) Retained Earnings as on January 1st, 2010             41,405 Add: Net Profit for Current Year                   861 Less: Dividend Distributed               4,730 Retained Earnings as on December 31st, 2010             37,536

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