Question

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 4,000 sets per year. Annual cost data at full capacity follow:

Direct labor	$	91,000
Advertising	$	98,000
Factory supervision	$	75,000
Property taxes, factory building	$	21,000
Sales commissions	$	61,000
Insurance, factory	$	6,000
Depreciation, administrative office equipment	$	2,000
Lease cost, factory equipment	$	10,000
Indirect materials, factory	$	17,000
Depreciation, factory building	$	109,000
Administrative office supplies (billing)	$	5,000
Administrative office salaries	$	106,000
Direct materials used (wood, bolts, etc.)	$	426,000
Utilities, factory	$	45,000

Cost Behavior Selling or Administrative Product Cost Cost Item Variable Fixed Cost Direct Indirect Direct labor Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory Depreciation, factory building Administrative office supplies (billing) Administrative office salaries Direct materials used (wood, bolts, etc.) Utilities, factory Total costs

Required:
1.	Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

       

2.	Compute the average product cost of one patio set. (Round your answer to nearest whole dollar.)

       

3.	Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?
	Increase Decrease Remain unchanged

Answer 1

Dorilane Company Requirement 1 Selling or Admin. Cost Product Cost Direct Indirect 91000 98000 75000 21000 61000 6000 Cost Item Direct labor Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory Depreciation, factory building Administrative office supplies (billing) Administrative office salaries Direct materials used (wood, bolts, etc.) Cost Behavior Variable Fixed 91000 98000 75000 21000 61000 6000 2000 10000 17000 109000 5000 106000 426000 45000 645000 427000 2000 10000 17000 109000 5000 106000 426000 45000 283000 Total costs 272000 517000 Requirement 2 The average product cost for one patio set would be: Direct Indirect Total 517000 283000 800000 Requirement 3 The average product cost per set would increase if the production drops. This is because the fixed costs would be spread over fewer units, causing the average cost per unit to rise.