Upstream and downstream costs
During 2011, Gallo Manufacturing Company incurred $90,000,000 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 2011. Manufacturing costs (direct materials, direct labor, and overhead) were expected to be $260 per unit. Packaging, shipping, and sales commissions were expected to be $50 per unit. Gallo expected to sell 2,000,000 batteries before new research renders the battery design technologically obsolete. During 2011, Gallo made 440,000 batteries and sold 400,000 of them.
Required
a.Identify the upstream and downstream costs.
b.Determine the 2011 amount of cost of goods sold and the ending inventory balance.
c.Determine the sales price assuming that Gallo desired to earn a profit margin equal to 25 percent of the total cost of developing, making, and distributing the batteries.
d.Prepare an income statement for 2011. Use the sales price determined in Requirement c.
e.Why would Gallo price the batteries at a level that would generate a loss for the 2011 accounting period?
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