FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Objective: Consider that you are an analyst at Regeneron Pharmaceuticals. You need to decide how to allocate administrative overhead costs to Regeneron's main commercial products (Eylea, Dupixent, Kevzara and Praluent). Determine how to appropriately allocate the costs in the table below to each of the commercial products using an allocation methodology of your choice. Department2019 Annual Operating ExpenseTime spent supporting Commercial productsCommercial$200MM100%IT$100MM25%Facilities$150MM0%Finance$25MM20%Human Resources$75MM10% Use the supporting document Net Product Sales of REGN Products to facilitate your analysis. Provide a written summary of how you allocated the overhead costs to each product in an outline of no more than one page. As a starting point, it's recommended that you revisit the material we covered in Chapter 12. Guidance on calculations:Start off with Net Product Sales of REGN Products. Your objective pertains to 2019 expenses, so you should be reviewing 2019 total revenue per product (ignore US and ROW sales). Itemize out total product revenue for Eylea, Dupixent, Praulent, and Kevzara and then divide each product's revenue by total 2019 revenue. This will give you the % portion that each product contributes to total sales. For example - Eylea contributed around 70%. Since you are only concerned with 4 out of the 8 products, you should group the combined revenue of all the remaining products into an Other and calculate the proportionate percentage of that - approximately 3%. Take a look at the numbers you were given in the table - Total 2019 Annual Operating Expense for each of the 5 departments. Consider what the third column "time spent supporting Commercial products" represents - 4 out of the 5 departments did not spend 100% of their time supporting Commercial products, so it wouldn't be appropriate to allocate all Operating Expense for 2019 to the four products. Instead you should adjust 2019 Operating Expense for Time Spent (so: Column 2 x Column 3) and calculate what you would call Adjusted 2019 Annual Operating Expense. This Adjusted Operating Expense is what's appropriate to allocate across all four products per your objective.Review the current data you have: the % share of each product's contribution to total sales revenue in 2019 and the Adjusted Operating Expense for 2019 per department. With the data we have, the best assumption we can make is that if a product is contributing more revenue to the company. If one product pulls in more revenue from sales than others, it must mean more of those products are being sold. If a certain product has more being sold, it also means the company manufactures more of those products than the ones that sold less. Manufacturing more of some products than others means they must have accrued more of the 2019 expenses.Considering all of that above - you should multiply the Adjusted 2019 Annual Operating Expense by the respective percentages of Eylea, Dupixent, Praluent, Kevzara, and Other. Show in a table what that allocation of expense per product looks like. It will be easier to calculate if the tables in your analysis follow this format:Product Sales:Product2019 Net Sales (millions)% of SalesEYLEADupixentPraluentKevzaraOtherTotal Final Allocation of Adjusted Operating Expense:DepartmentAdjusted Annual Op. ExpenseEYLEADupixentPraluentKevzaraCommercialITFacilitiesFinanceHuman ResourcesTotal In a Word document, you can include tables such as this made in Excel, etc. to show your calculations, and you should be explaining the logic of these calculations. You were originally asked to justify why you are allocating the operating expenses per department across the four products in the way that you are, so after calculating steps 1, 2, and 4, you should explain what those calculations represent. You should also realize what the Other category of your % of Sales category represents. These products should also be sharing a part of the 2019 operating expense, even though it may be much less than the top 4 products. You will notice that your allocation of each departments' operating expenses across the four products won't add up to what your total annual operating expenses were from Step 2. You should do a quick calculation of how much expense the 'Other' group should bear, and write a note about that in your written
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