Upstream and downstream costs During 2007 Moseley Pharmaceutical Company incurred $10,000,000 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 2007. Manufacturing costs (direct materials, direct labor, and overhead) to produce Allergone are expected to be $40 per unit. Packaging, shipping, and sales commissions are expected to be $5 per unit. Moseley expects to sell 1,000,000 units of Allergone before developing a new drug to replace it in the market. During 2007, Moseley produced 160,000 units of Allergone and sold 100,000 of them.

Required

a. Identify the upstream and downstream costs.

b. Determine the 2007 amount of cost of goods sold and the December 31, 2007, ending inventory balance.

c. Determine the unit sales price Moseley 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 2007 using the sales price from Requirement c.

e. Why would Moseley price Allergone at a level that would generate a loss for 2007?