Question

Exercise 1-10A (Algo) Identifying upstream and downstream costs LO 1-4

During year 1, Rundle Manufacturing Company incurred $126,000,000 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 $58 per unit. Packaging, shipping, and sales commissions are expected to be $18 per unit. Rundle expects to sell 2,800,000 batteries before new research renders the battery design technologically obsolete. During year 1, Rundle made 440,000 batteries and sold 402,000 of them.

Required

1. Identify the upstream and downstream costs.

2. 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.

3. Determine the sales price assuming that Rundle desires to earn a profit margin that is equal to 25 percent of the total cost of developing, making, and distributing the batteries.

4. Prepare a GAAP-based income statement for year 1. Use the sales price developed in Requirement c.