Question

Exercise 1-10A (Algo) Identifying upstream and downstream costs LO 1-4 During year 1, Jordan Manufacturing Company incurred $132,000,000 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 $68 per unit. Packaging, shipping, and sales commissions are expected to be $14 per unit. Jordan expects to sell 3,000,000 batteries before new research renders the battery design technologically obsolete. During year 1, Jordan made 437000 batteries and sold 394,000 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 Jordan 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.

Answer 1

( a ) Identify the upstream and downstrem costs
1	Research and Development	Upstream cost
2	Packaging	Downstream cost
3	Shipping	Downstream cost
4	Sales commission	Downstream cost
( b) Determine cost of goods sold and ending inventory
	$
Cost of goods sold	26792000	($68 X 394000)
Ending inventory	2924000	$68 X (437000-394000)
( c ) sales price
Determine sales price assuming that Jordan desire to earn profit margin that
is equal to 25 percent of the total cost of developing ,making ,and distributing
the batteries.
therefore,
	$
Manufacturing cost	68
sales commission	14
Research and Development	44	($132000000/3000000)
Total cost	126
Profit	32	($126 X 25%)
Sales price	158
(d) Income statement
Jordan Manufacturing company
Income Statement
	$
Sales Revenue	62252000	($158 X 394000)
Less : Cost of goods sold	26792000
Gross profit	35460000
Less : sales commission	5516000	($14*394000)
Less :Research and Development	132000000
Net income( Loss )	-102056000