During 2017, Hutton Pharmaceutical Company incurred $35,000,000 of research and development (R&D) costs to develop a new hay fever drug called Allergone. In accordance with FASB standards, the entire R&D cost was recognized as expense in 2017. Manufacturing costs (direct materials, direct labor, and overhead) to produce Allergone are expected to be $20 per unit. Packaging, shipping, and sales commissions are expected to be $3 per unit. Hutton expects to sell 5,000,000 units of Allergone before developing a new drug to replace it in the market. During 2017, Hutton produced 800,000 units of Allergone and sold 600,000 of them. Assume all financial statement data are prepared in accordance with GAAP.
Required
a. Identify the upstream and downstream costs.
b. Determine the 2017 amount of cost of goods sold and the December 31, 2017, ending inventory balance.
c. Determine the unit sales price Hutton should establish assuming it desires to earn a profit margin equal to 40 percent of the total cost of developing, manufacturing, and distributing Allergone.
d. Prepare an income statement for 2017 using the sales price from Requirement c.
e. Given that the price was properly established using total costs (upstream, midstream and downstream costs), why does the GAAP-based income statement prepared in Requirement d show a loss?