During 2014, Welch Manufacturing Company incurred $67,000,000 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 2014. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $250 per unit. Packaging, shipping, and sales commissions are expected to be $50 per unit. Welch expects to sell 2,000,000 batteries before new research renders the battery design technologically obsolete. During 2014, Welch made 440,000 batteries and sold 400,000 of them.
a. Identify the upstream and downstream costs.
b. Determine the 2014 amount of cost of goods sold and the ending inventory balance.
c. Determine the sales price assuming that Welch desires to earn a profit margin that is equal to 25 percent of the total cost of developing, making, and distributing the batteries.
d. Prepare an income statement for 2014. Use the sales price developed in Requirement c.
e. Why would Welch price the batteries at a level that would generate a loss for the 2014 accounting period?