Question

Check During year 1. Rooney Manufacturing Company incurred $8,000,000 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 $45 per unit. Packaging, shipping, and sales commissions are expected to be $8 per unit. Rooney expects to sell 2,000,000 batteries before new research renders the battery design technologically obsolete. During year 1, Rooney made 440,000 batteries and sold 400,000 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 Rooney desires to earn a profit margin that is equal to 25 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 Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Identify the upstream and downstream costs.

Answer 1

According to the question, our first requirement is to identify the upstream and downstream cost.

Meaning of Upstream cost:- The cost which is incurred before manufacturing process starts, that is called upstream cost.

Meaning of Downstream cost:- The cost which is incurred after manufacturing process completed, that is called downstream cost.

Requirement A :- Identify Upstream and Downstream Cost.

Solution:-

1.	Research and Development	Upstream Cost
2.	Packing	Downstream Cost
3.	Shipping	Downstream Cost
4.	Sales Commissions	Downstream Cost

Requirement B :- Determining the year 1 amount of Cost of Goods Sold and the Ending Inventory balance that would appear on the financial statement that are prepared in accordance with GAAP.

Solution:-

Cost of Goods Sold (Working Note)	$18,000,000
Ending Inventory (Working Note)	$1,800,000

Working Note:-

Calculation of Cost of Goods Sold = Batteries Sold * Manufacturing Cost

= 400,000 * $45 = $18,000,000

Calculation of Ending Inventory = (Batteries Made - Batteries Sold) * Manufacturing Cost

= (440,000 - 400,000) * $45 = $1,800,000

Requirement C :- Determining the sales price assuming that the Rooney desires to earn a profit margin that is equal to 25 percent of the total cost of developing, making and distributing the batteries.

Solution:-

Sales Price (Working Note)

$71.25

Working Note:-

Calculation of Sales price- While calculating the sales price, first of all we have to calculate the Cost per unit.

Calculation of Cost per unit = Manufacturing Cost + Packing, Shipping, Commission cost + Research & Development Cost

= $45 + $8 + $4 (Working Note #)

= $57 Cost price per unit

# Research and Development cost = Cost Incurred / Batteries expected to sell = $8,000,000 / 2,000,000 = $4

Sale price = Cost price + 25 % of Cost price

or

Cost price * 1.25

   = $57 + 25%

= $71.25

Requirement D :- Prepared a GAAP- based income statement for year 1. Uses the Sales price developed in requirement c.

Solution:-

ROONEY MANUFACTURING COMPANY

Income Statement

Sales (400,000 * $71.25)	$28,500,000
Cost of Goods sold (Calculated in requirement b)	($18,000,000)
Gross Margin	$10,500,000
Research and Development (Given in question)	($ 8,000,000)
Selling Expenses (400,000 * $8)	($ 3,200,000)
Net Income (Loss)	($ 700,000)

There is a Net Loss of $700,000.

Thank you..

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