Storage Technology Corporation (StorageTek) is a manufacturer of computer storage devices. StorageTek continually modifies its existing products and develops new ones. These improvements permit larger amounts of data to be stored and accessed more quickly.

One of StorageTek’s new products was called Iceberg.An Iceberg system comprised many small storage devices designed to work together. StorageTek was quite optimistic about Iceberg’s future success.

Because Iceberg held clear advantages over other systems that StorageTek sells, StorageTek needed to reduce the selling price of these other systems. Because of this, StorageTek must also ensure that the recorded value of its inventory is not overstated. In fact, in the first quarter of 1994, shortly before Iceberg was marketed to the public, StorageTek reduced the recorded value of its older storage systems by $7,500,000.Write-downs such as this are rather common in industries that experience rapid technological change.

For the first quarter in 1994, StorageTek reported the following:

Revenue $335,623,000 Cost of goods sold $234,315,000 Assume that the $7,500,000 charge was included in cost of goods sold.