Competency 4.2 Mark Johnson is controller for a Pharmaceutical company. During t

Question

Competency 4.2 Mark Johnson is controller for a Pharmaceutical company. During the company’s midyear review, Johnson notes that the company’s R&D expenditures are already $3.0 billion, nearly 40% above the midyear target. In a meeting with the CFO later that day, Johnsons delivers the bad news to the CFO, Pauline Stewart. Stewart was shocked and outraged that the R&D spending had gotten out of control. Stewart wasn’t any more understanding when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lucexx, which was expected to go to market next year. The new drug would result in large profits for the company, if the product could be approved by year-end. Johnson came up with the following ideas for making the third-quarter budgeted targets:Sell off rights to the drug, Martek. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would, however, result in a onetime revenue that could offset the budget shortfall. The patent on Martek is about to expire, after which any competitor can make the drug. On balance, the results on the company of this action are:(2.5 point)
A.An overall positive effect on short-term profits, while not affecting expected long-term profits
B.An overall negative effect on short-term profits, while not affecting expected long-term profits
C.An overall positive effect on short-term profits, while diminishing expected long-term profits
D.No predictable effect on short-term profits

Explanation / Answer

Sell off rights to the drug, Martek - would raise the one time revenue that could offset the budget shortfall, but ruines the future revenue and thus affects the future profits. So, the immediate effect of this transaction is:

" C. An overall positive effect on short-term profits, while diminishing expected long-term profits"

This is because the selling off right will deprive the company from the future benefits from the drug. Thus, increase in the current revenue/income will hamper the future revenue/income.

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