1-28 Pharmaceutical company, budgeting, ethics. Eric Johnson was recently promot
ID: 2486002 • Letter: 1
Question
1-28 Pharmaceutical company, budgeting, ethics. Eric Johnson was recently promoted to Controller of Research and Development (R&D;) for PharmaCor, a Fortune 500 pharmaceutical company, which manufactures prescription drugs and nutritional supplements. The company's total R&D; cost for 2012 was expected (budgeted) to be $5 billion. During the company's mid-year budget review, Eric realized that current R&D; expenditures were already at 3.5 billion, nearly 40% above the mid-year target. At this current rate of expenditure, the R&D; division was on track to exceed its total year-end budget by S2 billion! In a meeting with CFO, James Clark, later that day, Johnson delivered the bad news. Clark was b shocked and outraged that the R&D; spending had gotten out of control. Clark wasn't any more understand- ing when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lyricon, which was expected to go to market next year. The new drug would result in large profits for PharmaCor, if the product could be approved by year-end. Clark had already announced his expectations of third quarter earnings to Wall Street analysts. If the R&D; expenditures weren't reduced by the end of the third quarter, Clark was certain that the targets he had announced publicly would be missed and the company's stock price would tumble. Clark instructed Johnson to make up the budget short-fall by the end of the third quarter using "whatever means necessary."Explanation / Answer
Option A & B are feasible as per "Standards of Ethical Behaviour". But option C is Unacceptable since it is not as per GAAP.
Option B is recommended amonst the options given since Option A would reduce cos cost of sometime but in the next quarter the cost is bound to happen.
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