16 Dec Upstream and downstream costsDuring 2009, Earwood
Upstream and downstream costsDuring 2009, Earwood Manufacturing Company incurred $8,000,000 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 2009. Manufacturing costs (direct materials, direct labor, and overhead) were expected to be $22 per unit. Packaging, shipping, and sales commissions were expected to be $8 per unit. Earwood expected to sell 200,000 batteries before new research renders the battery design technologically obsolete. During 2009, Earwood made 21,000 batteries and sold 18,000 of them.Requireda. Identify the upstream and downstream costs.b. Determine the 2009 amount of cost of goods sold and the ending inventory balance.c. Determine the sales price assuming that Earwood 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 2009. Use the sales price developed in Requirement c.e. Why would Earwood price the batteries at a level that would generate a loss for the 2009 accounting period?
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