The following scenario illustrates several issues concerning revenue recognition, particularly impacting sustainable earnings or operating profits. You should also consider the managerial implications associated with these issues.

A computer firm designs, builds, and sells a microcomputer, called a PEAR, for

$1,800. The design costs of the computer are well in excess of $30,000,000 and only 10,000,000 computers are expected to be sold before they are obsolete. A Korean company is currently selling identical computers for $1,500. A Japanese company has just invested a new cursor device to replace the mouse (they call it a RAT). This new RAT will only work with computers sold by the Japanese company. The Japanese computers perform very similar functions to each of the computers described earlier. It sells for $1,200. Discounters have been selling the PEAR for $1,100 via telephone and catalog sales. The PEAR and the Korean clone are essentially obsolete, but will still reach their original volume projections. The primary developer of the PEAR has just resigned and formed a new company that is expected to design a competitive computer that will be superior to any of these other three models (PEAR, Korean clone, Japanese computer).

Required Indicate how the PEAR managers might view each of these issues in forecasting their operating income for the next year.