CT 11-5 (Static) Profitability versus social conscience (effects of cost behavior) LO 11-1

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Advances in biological technology have enabled two research companies, Bio Labs, Incorporated and Scientific Associates, to develop an insect-resistant corn seed. Neither company is financially strong enough to develop the distribution channels necessary to bring the product to world markets. World Agra Distributors, Incorporated has negotiated contracts with both companies for the exclusive right to market their seed. Bio Labs signed an agreement to receive an annual royalty of $1,000,000. In contrast, Scientific Associates chose an agreement that provides for a royalty of $0.50 per pound of seed sold. Both agreements have a 10-year term. During Year 1, World Agra sold approximately 1,600,000 pounds of the Bio Labs, Incorporated seed and 2,400,000 pounds of the Scientific Associates seed. Both types of seed were sold for $1.25 per pound. By the end of Year 1, it was apparent that the seed developed by Scientific Associates was superior. Although insect infestation was virtually nonexistent for both types of seed, the seed developed by Scientific Associates produced corn that was sweeter and had consistently higher yields.

World Agra Distributorss chief financial officer, Roger Weatherstone, recently retired. To the astonishment of the annual planning committee, Mr. Weatherstones replacement, Ray Borrough, adamantly recommended that the marketing department develop a major advertising campaign to promote the seed developed by Bio Labs, Incorporated. The planning committee reluctantly approved the recommendation. A $100,000 ad campaign was launched; the ads emphasized the ability of the Bio Labs seed to avoid insect infestation. The campaign was silent with respect to taste or crop yield. It did not mention the seed developed by Scientific Associates. World Agras sales staff was instructed to push the Bio Labs seed and to sell the Scientific Associates seed only on customer demand. Although total sales remained relatively constant during Year 2, sales of the Scientific Associates seed fell to approximately 1,300,000 pounds while sales of the Bio Labs, Incorporated seed rose to 2,700,000 pounds.