Question

During year 1, Adams Manufacturing Company incurred $120,000,000 of research and development (R&D) costs to create a long-life battery to use in computers. In accordance with FASB standards, the entire R&D cost was recognized as an expense in year 1. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $66 per unit. Packaging, shipping, and sales commissions are expected to be $18 per unit. Adams expects to sell 2,500,000 batteries before new research renders the battery design technologically obsolete. During year 1, Adams made 430,000 batteries and sold 396,000 of them. Required a. Identify the upstream and downstream costs b. Determine the year 1 amount of cost of goods sold and the ending inventory balance that would appear on the financial statements that are prepared in accordance with GAAP. c. Determine the sales price assuming that Adams desires to earn a profit margin that is equal to 20 percent of the total cost of developing, making, and distributing the batteries. d. Prepare a GAAP-based income statement for year 1. Use the sales price developed in Requirement c. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Determine the year 1 amount of cost of goods sold and the ending inventory balance that would appear on the financial statements that are prepared in accordance with GAAP. Cost of goods sold Ending inventory Required A Required B Required Required D Determine the sales price assuming that Adams desires to earn a profit margin that is equal to 20 percent of the total cost of developing, making, and distributing the batteries. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Sales price Prepare a GAAP-based income statement for year 1. Use the sales price developed in Requirement c. (Do not round intermediate calculations.) ADAMS MANUFACTURING COMPANY Income Statement Notinomodore

Answer 1

Adams Manufacturing Company Requirement a The $120,000,000 of research and development cost is an upstream cost while packaging, shipping, and sales commissions are downstream costs. Requirement b Cost of goods sold: $66 x 396,000 = 26,136,000 Ending inventory: $66 x 34,000 = $2,244,000 Requirement 66 18 Upstream cost per unit, $120,000,000 + 2,500,000 Manufacturing cost per unit Downstream costs per unit Total cost Plus: 20% profit margin, $132 x 20% Price 132 26.4 158.4 Requirement d Income Statement Sales revenue ($158.4 x 396,000) Cost of goods sold Gross margin Research and development Selling expenses ($18 x 396,000) Net income (Loss) 62726400 -26136000 36590400 -120000000 -7128000 -90537600