Question

Exercise 1-10A (Algo) Identifying upstream and downstream costs LO 1-4 During year 1, Benson Manufacturing Company incurred $98,400,000 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 $20 per unit. Benson expects to sell 2,400,000 batteries before new research renders the battery design technologically obsolete. During year 1, Benson made 449,000 batteries and sold 398,000 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 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

No.	Cost
1	Research and development	Upstream
2	Packaging	Downstream
3	Shipping	Downstream
4	Sales commission	Downstream

Upstream costs are those that are directly related to cost of production whereas Downstream costs are those that are incurred after the manufacturing process is complete

B

No	Particulars	Amount ($)
1	Cost of goods sold (Batteries sold X Manufacturing cost)	$17512000 (398000 X $44)
2	Ending inventory (Units unsold X Manufacturing cost)	$2244000 [(449000 - 398000) X $44]

C

Sales price = [(Research cost + Manufacturing cost + Downstream cost) X (100+20)%]
=> [($98400000 / 2400000 batteries expected to sell) + $44 + $20] X 120%
=>[($41 + $44 + $20) X 120%]
=> $126 (Ans)

D

Income Statement

Particulars	Amount ($)
Sales revenue (398000 batteries X $126)	50148000
Less: Cost of goods sold	(17512000)
Gross profit	32636000
Less: Research and development cost	(98400000)
Less: Selling expenses ($20 X 398000 batteries)	(7960000)
Net income/(Loss)	($73724000)

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