Question

Exercise 1-10A Identifying upstream and downstream costs LO 1-4 During 2017, Rooney Manufacturing Company incurred $118,800,000 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 2017. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $74 per unit. Packaging, shipping, and sales commissions are expected to be $11 per unit. Rooney expects to sell 2,700,000 batteries before new research renders the battery design technologically obsolete. During 2017, Rooney made 432,000 batteries and sold 392,000 of them. Required a. Identify the upstream and downstream costs. b. Determine the 2017 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 Rooney desires to earn a profit margin that is equal to 30 percent of the total cost of developing, making, and distributing the batteries. d. Prepare a GAAP-based income statement for 2017. Use the sales price developed in Requirement c. Complete this question by entering your answers in the tabs below. Required B Required C Required D Determine the 2017 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 C

Answer 1

Rooney Manufacturing Company Requirement a The $118,800,000 of research and development cost is an upstream cost while packaging, shipping, and sales commissions are downstream costs. Requirement b Cost of goods sold: $74 x 392,000 = $29,008,000 Ending inventory: $74 x 40,000 = $2,960,000 Requirement c 44 74 Upstream cost per unit, $118,800,000 + 2,700,000 Manufacturing cost per unit Downstream costs per unit Total cost Plus: 30% profit margin, $129 x 30% 129 38.7 167.7 Price Requirement d Income Statement Sales revenue ($167.7 x 392,000 Cost of goods sold Gross margin Research and development Selling expenses ($11 x 392,000) Net income (Loss) 65738400 -29008000 36730400 -118800000 -4312000 -86381600