Chapter 1, Problem 23PSB

a.

To determine

The total amount of upstream cost.

Explanation of Solution

Upstream cost: This cost is incurred before starting the manufacturing process such as research and development, and product design.

The given information:

• Product design cost is $520,000.
• Research and development cost is $1,800,000.

The calculation of upstream cost is as follows:

$\begin{array}{c}\text{Upstream cost}=\text{Product design cost}+\text{Research and development cost}\\ =\$520,000+\$1,800,000\\ =\$2,320,000\end{array}$

Hence, the upstream cost is $2,320,000.

b.

To determine

The total amount of downstream cost.

Explanation of Solution

Downstream: This cost is incurred after starting the manufacturing process such as marketing, distribution, and customer service

The given information:

• Advertisement cost is $400,000.
• Administrative cost is $250,000.

The calculation of downstream cost is as follows:

$\begin{array}{c}\text{Downstream cost}=\text{Advertisement cost}+\text{Administrative cost}\\ =\$400,000+\$250,000\\ =\$650,000\end{array}$

Hence, the downstream cost is $650,000.

c.

To determine

The total amount of midstream cost.

Explanation of Solution

Mid-stream: It is a cost incurred in making a product. It includes direct labor, direct materials, and manufacturing overheads.

The given information:

• Direct materials are $450.
• Direct labor is $180
• Manufacturing overheads are $300.
• Total production is 5,000 units.

The calculation of midstream cost is as follows:

$\begin{array}{c}\text{Midstream cost}=\left(\begin{array}{l}\left(\text{Direct materials}+\text{Direct labor}+\text{Manufacturing overheads}\right)\\ \times \text{Number of units produced}\end{array}\right)\\ =\left(\$450+\$180+\$300\right)\times 5,000\text{ units}\\ =\$930\times 5,000\text{ units}\\ \text{=\$4,650,000}\end{array}$

Hence, the midstream cost is $4,650,000.

d.

To determine

The total amount of sales price.

Explanation of Solution

The given information:

• Direct materials are $450.
• Direct labor is $180
• Manufacturing overheads are $300.
• Total production is 5,000 units.
• 160% on GAPP defined product.

The calculation of sales price is as follows:

$\begin{array}{c}\text{Sales price}=\left(\begin{array}{l}\left(\text{Direct materials}+\text{Direct labor}+\text{Manufacturing overheads}\right)\\ \times \text{ Percentage defined on product cost}\end{array}\right)\\ =\left(\$450+\$180+\$300\right)\times 160\%\\ =\$930\times 160\%\\ \text{=\$1,488}\end{array}$

Hence, the sales price is $1,488.

e.

To determine

The income statement based on GAPP.

Answer to Problem 23PSB

The calculation of income statement of Company D is as follows:

Hence, the company has a net loss of $180,000.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

The given information:

• Direct materials are $450.
• Direct labor is $180
• Manufacturing overheads are $300.
• Total production is 5,000 units.
• Product design cost is $520,000.
• Research and development cost is $1,800,000.
• Advertisement cost is $400,000.
• Administrative cost is $250,000.

The sales revenue is calculated as follows:

$\begin{array}{c}\text{Sales revenue}=\text{Sales price}\times \text{Number of units}\\ =\$1,488\times 5000\text{ units}\\ =\$7,440,000\end{array}$

Hence, the sales revenue is $7,440,000.

(1)

The cost of goods sold is calculated as follows:

$\begin{array}{c}\text{Cost of goods sold}=\left(\begin{array}{l}\left(\text{Direct materials}+\text{Direct labor}+\text{Manufacturing overheads}\right)\\ \times \text{Number of units}\end{array}\right)\\ =\left(\$450+\$180+\$300\right)\times 5000\text{ units}\\ =\$930\times 5000\text{ units}\\ \text{=\$4,650,000}\end{array}$

Hence, the cost of goods sold is $4,650,000.

(2)

f.

To determine

Explain the reason for the net loss.

Explanation of Solution

The management failed to consider the cost of downstream and upstream while pricing the product. Only the cost of GAPP based prices were considered. The selling price of the product is $1,488 and the total cost price of the product is $1,524 (3). Therefore, the selling price is less than the cost per unit and this explains why the company is facing loss.

Working notes:

The total cost per unit is calculated as follows:

$\begin{array}{c}\text{Total cost per unit}=\left(\begin{array}{l}\text{Midstream}+\text{Upstream}/\text{Number of units}+\\ \text{Downstream}/\text{Number of units}\end{array}\right)\\ =\$930+\$2,320,000/5000\text{ units}+\$650,000/5000\text{ units}\\ \text{=\$930+\$464+\$130}\\ \text{=\$1,524}\end{array}$

Hence, the total cost per unit is $1,524.