During Year 2, Fanning Manufacturing Company incurred $75,200,000 of research and development (R&D) costs to create a long-life battery to use in computers. In accordance with FASB standards, the entire R&D cost was recognized as an expense in Year 2. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $62 per unit. Packaging, shipping, and sales commissions are expected to be $11 per unit. Fanning expects to sell 1,600,000 batteries before new research renders the battery design technologically obsolete. During Year 2, Fanning made 441,000 batteries and sold 406,000 of them.

Required

Identify the upstream and downstream costs.

Determine the Year 2 amount of cost of goods sold and the ending inventory balance that would appear on the financial statements that are prepared in accordance with GAAP.

Determine the sales price assuming that Fanning desires to earn a profit margin that is equal to 20 percent of the total cost of developing, making, and distributing the batteries.

Prepare a GAAP-based income statement for Year 2. Use the sales price developed in Requirement c.