Question: During 2014, Welch Manufacturing Company incurred $124,200,000 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 2014. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $268 per unit. Packaging, shipping, and sales commissions are expected to be $60 per unit. Welch expects to sell 2,700,000 batteries before new research renders the battery design technologically obsolete. During 2014, Welch made 445,000 batteries and sold 396,000 of them.

A. Identify the upstream and downstream costs.

1. Research and development

2. Packaging

3. Shipping

4. Sales commissions

B. Determine the 2014 amount of cost of goods sold and the ending inventory balance.

1. Cost of goods sold

2. Ending inventory

C. Determine the sales price assuming that Welch desires to earn a profit margin that is equal to 20 percent of the total cost of developing, making, and distributing the batteries

1. Sales price

D. Prepare an income statement for 2014. Use the sales price developed in Requirement C.