Steven Chow, the sales director of sales department of HK Drug Company Limited $($HK Drug$),$ has requested a comprehensive review of the profitability of the company$$s two major drug product lines from the finance office. The product lines include two new drugs, namely Drug X and Drug Y$.$ Both drugs require significant investments in research and development as well as advertising. Upon reviewing the statement provided by HK Drug$$s finance office, Steven concluded that Drug X is the more profitable drug, leading him to consider implementing costcutting measures for Drug Y$.$

Drug X

Sales: $$3,900,000$

Cost of goods sold: $$2,500,000$

Gross profit : $$1,400,000$

Drug Y

Sales: $$2,500,000$

Cost of goods sold: $$1,500,000$

Gross profit: $$1,000,000$

Total $($Drug X $+$ Drug Y$)$

Sales: $$6,400,000$

Cost of goods sold: $$4,000,000$

Gross profit: $$2,400,000$

Research and development: $$900,000$

Selling expenses: $$100,000$

Operating profit before taxes: $$1,400,000$

a$)$ Explain whether Steven is correct in his assessment of the relative performances of the two products.

b$)$ Suppose that $85\%$ of the research and development and selling expenses are related to Drug X$.$ Determine the life$-$cycle profit for each product and calculate the return on sales ratio for each c$)$ Given your answer to $($a$)$ and $($b$),$ suppose Steven has strongly supported development of Drug X$,$ ignoring the high selling and research and development expenses. He has guaranteed to the senior managers and the board of directors that the Drug X investment will provide improved profits for the company.

Discuss any ethical issues when Steven reports to top management and the board of directors on the profitability prospects of the two products.Question $2(25$ marks$)$

Steven Chow, the sales director of product.

c$)$ Given your answer to $($a$)$ and $($b$),$ suppose Steven has strongly supported development of Drug X$,$ ignoring the high selling and research and development expenses. He has guaranteed to the senior managers and the board of directors that the Drug X investment will provide improved profits for the company.

Discuss any ethical issues when Steven reports to top management and the board of directors on the profitability prospects of the two products.