Digital Tunes Inc. is in the business of developing, promoting, and selling musical talent on compact disc (CD). The company signed a new group, called Smashing Britney, on January 1, 2010. For the first six months of 2010, the company spent $4,000,000 on a media campaign for Smashing Britney and $1,200,000 in legal costs. The CD production began on February 1, 2010.

Digital Tunes uses a job order cost system to accumulate costs associated with a CD title. The unit direct materials cost for the CD is:

Blank CD $1.80

Jewel Case $0.60

Song lyric insert $0.60

The production process is straightforward. First, the blank CDs are brought to a production area where the digital soundtrack is copied onto the CD. The copying machine requires one hour per 2,400 CDs. After the CDs are copied, they are brought to an assembly area where an employee packs the CD with a jewel case and song lyric insert. The direct labor cost is $0.25 per unit. The CDs are sold to record stores. Each record store is given promotional materials, such as posters and aisle displays. Promotional materials cost $40 per record store. In addition, shipping costs average $0.25 per CD.

Total completed production was 1,000,000 units during the year. Other information is as follows:

Number of customers (record stores) 42,500

Number of CDs sold 850,000

Wholesaler price (to record store) per CD $16

Factory overhead cost is applied to jobs at the rate of $1,200 per copy machine hour. There were an additional 25,000 copied CDs, packages, and inserts waiting to be assembled on December 31, 2010.


1. Prepare an annual income statement for the Smashing Britney CD, including supporting calculations. Enter all amounts as positive numbers.

2. Determine the balances in the work in process and finished goods inventory for the Smashing Britney CD on December 31, 2010.