Question

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 3,900 sets per year. Annual cost data at full capacity follow: 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 $ 87.000 $ 100.000 $ 70,000 $ 20,000 $ 60,000 $ 6.000 $ 2.000 $ 10,000 $ 16,000 $ 110,000 $ 5,000 $ 100.000 $ 434,000 $ 48,000 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. 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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.) Cost Behavior Period (Selling - Administrative) Cost or Product Cost Variable Fixed Direct Indirect 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.) Utilities, factory Total costs S 0S 0S 0S 0S 0

Answer 1

Answer-1:

Selling or Cost behavior Product Cost Cost Items administrative Variable Fixed Indirect Direct cost Direct labour 87,000 87,000 $ 100,000 $ Advertising 100,000 70,000 Factory supervision 70,000 Property taxes, factory building 20,000 20,000 Sales commission 60,000 60,000 Insurance, factory 6,000 6,000 Depreciation, administrative office equipment 2,000 2,000 Lease cost, factory equipment 10,000 10,000 Indirect materials, factory 16,000 16,000 Depreciation, factory building 110,000 110,000 Administrative office supplies (billing) 5,000 5,000 Administrative office salaries 108,000 108,000 Direct materails used (wood bolts, etc) 434,000 434,000 Utilities, factory 48,000 $ 650,000 $ 426,000 $ 48,000 275,000 $ 521,000 $ Total costs 280,000

Answer-2:

Average product cost = ($521,000 + 280,000) / 3,900 = $205.38

Answer-3:

The average product cost per set will increase if the production drops to only 1,000 sets annually because the fixed cost per unit will increase if the less number of sets are produced