Question

During year 1, Benson Manufacturing Company incurred $51,600,000 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 $44 per unit. Packaging, shipping, and sales commissions are expected to be $11 per unit. Benson expects to sell 1200,000 batteries before new research renders the battery design technologically obsolete. During year 1, Benson made 430,000 batteries and sold 390,000 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 Benson 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 Required B Required Required D Determine the sales price assuming that Benson desires to earn o pront margin that is equal to 2 percent of the total cost of developing, making, and distributing the batteries. (Do not round intermediate calculation Round your inal answer to 2 decimal places Sales price < Required a Required D >

Answer 1

Answer:

Requirement A:

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 is called downstream cost.

1.	Research and Development	Upstream cost
2.	Packing	Downstream cost
3.	Shipping	Downstream cost
4.	Sales Commission	Downstream cost

Requirement B:

Cost of Goods Sold (working note)	$17,160,000
Ending Inventory (working note)	$1,760,000

Working note:

Calculation of Cost of Goods Sold = Batteries sold × Manufacturing cost

= 390,000 × $44 = $17,160,000

Calculation of Ending Inventory:

= (Batteries made - Batteries sold)× manufacturing cost

= (430,000 - 390,000) × $44

= $1,760,000

Requirement C:

Sales price (working note)

$122.5

Working note:

Calculation of Sales Price :- While calculating sales price, first of all we have to calculate cost per unit.

Cost per unit :

= Manufacturing cost + Packing, Shipping, Commission cost + Research and Development cost

= $44 + $11 + 43( working)

= $98

Working:

Research and development cost = Cost incurred/ Batteries expected to sell

= $51,600,000 / 1,200,000

= $43 per unit

Sales price = Cost price + 25% of cost price

= $98 + ($98 × 25%)

= $122.5

Requirement D:

ROONEY MANUFACTURING COMPANY

Income Statement

	$
Sales ( 390,000 × $122.5)	47,775,000
Cost of goods sold (calculated in requirement b)	17,160,000
Gross margin	30,615,000
Research and development (given)	51,600,000
Selling expenses (390,000 × $11)	4,290,000
Net income (loss)	(25,275,000)

There is a net loss of $25,275,000

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Have a great day Champ!