Question

P5-54. Research and Development Expense International Business Machines Corporation (IBM) reported the following on its 2018 form 10-K. LO6 ATIONAL NESS HINES RATION BM) $ millions 2018 2017 2016 eW04 BC Total revenue .... Research, development and engineering expense ... Number of new patents awarded .. $79,591 5,379 9,100 $79,139 5,590 9,043 $79,919 5,726 8,088 Required a. Calculate IBM's common-size research, development and engineering expense for each year. What pattern do we observe? Is this of potential concern to investors? b. Compute the research, development and engineering expense per new patent for each year. What pat- tern do we observe? What flaw is there in this metric? c. What other data might analysts and investors collect to form an opinion about the level and effective- ness of IBM's R&D endeavors?

Answer 1

a.) Common Size expense = Revenue/Expense * 100

2018= 5379/79591*100=6.6%

2017= 5590/79139*100= 7.06%

2016= 5726/79919*100=7.16%

The common size expense is decreasing each year. It is a potential concern to investors. Because reducing common size expense is good for the organisation.

b)Expense per new patent= Expense/Number of new patents.

2016= 5726/8088=.707

2017= 5590/9043= .618

2018= 5379/9100=.591

Expense per new patent is reducing each year.