used by salespersons iation on vehicles used in a plant De am and downstream costs Exercise 1-10B Upstreanm 2017, Hutton Pharmaceu costs to develop a new hay fever tical Com pany incurred $35,000,000 of research and development drug called Allergone. In accordance with PASB standards R&D; &D; cost was recognized as expense in 2017. Manufacturing costs (direct materials, direct LO1A the entire abor, and salesCoeloping a new drug to replace it in the market. During 2017, Hutton produced 800,000 units e entire overhead) to produce Allergone are expected to be $20 per unit. Packaging, shipping, and issions are expected to be S3 per unit. Hutton expects to sell 5,000,000 units of Allergone commissions a developing a ne e and sold 600,000 of them. Assume all financial statement data are prepared in accot- dance with GAAP Required of Alle ntify the upstream and downstream costs. a ldemny ine the 2017 amount of cost of goods sold and the December 31,2017, ending inventorsy b. balance Determine the unit sales price Hutton should establish assuming it desires to earn a proft margin I to 40 percent of the total cost of developing, manufacturing, and distributing Allergone. equa
a.
Upstream costs are the costs incurred before the production starts. In the present case the research and development costs of $35,000,000 are the upstream costs.
Downstream costs are the costs incurred after the production is completed and before the product reaches the customer. In the present case, the packaging, shipping and sales commission of $3.00 per unit are the downstream costs.
b.
c.
d.
e.
The reason why the income statement shows a loss is the fact that the development costs for the product are $35,000,000 and we could recover only $4,200,000 (600,000 x $7.00) form the sale during the year. The total development costs (for 5,000,000 units) have been expensed in the year as per GAAP, whereas the company could recover the costs only from 600,000 units.
| Cost of goods sold (600,000 x $20.00) | 7200000 |
| Value of ending inventory (200,000 x 20) | 4000000 |
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