Question

The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company is currently operating at 80% of its full capacity of 2,900 sets per quarter . Quarterly cost data at this level of operations follow: Factory labour, direct Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, office equipment Lease cost, factory equipment Indirect materials, factory Depreciation, factory building General office supplies (billing) General office salaries Direct materials used (wood, bolts, etc.) Utilities, factory $122,500 50,900 40,900 4,400 84,500 3,400 4,900 12,900 6,900 10,900 3,900 64,500 98,500 20,900 Required: 1. Enter the dollar amount of each cost item under the appropriate headings. As examples, this has been done already for the first two items in the preceding list. 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 as shown.)

Answer 1

1.

Cost Item	Cost Behaviour		Selling and Administrative Cost	Product Cost
	Variable Cost	Fixed Cost		Direct	Indirect*
Factory labor, direct	122500			122500
Advertising		50900	50900
Factory supervision		40900			40900
Property taxes, factory building		4400			4400
Sales commissions	84500		84500
Insurance, factory		3400			3400
Depreciation, office equipment		4900	4900
Lease cost, factory equipment		12900			12900
Indirect materials, factory	6900				6900
Depreciation, factory building		10900			10900
General office supplies (billing)	3900		3900
General office salaries		64500	64500
Direct materials used (wood, bolts, etc)	98500			98500
Utilities, factory	20900				20900
Total costs	337200	192800	208700	221000	100300
*To units of product.

2. Average product cost: $138 per patio set

	Product Cost
Direct	221000
Indirect	100300
Total $	321300
Number of sets produced (80% x 2900)	2320
Average cost per set $ ($321300/2320)	138

3. Decrease

With an increase in production from 2320 sets to 2610 sets, the variable cost per set will remain unchanged however, the fixed cost per set will decrease as the total fixed cost which is constant is spread over a larger number of sets. Hence, the average product cost per set will decrease.

4a. Yes, the president may expect a minimum price of $138.

Disagreement over the price between the president and brother-in-law is expected.

The price that the president has in mind is probably the full cost of $138 while the price that the brother-in-law has in mind is the direct product cost since the company is operating below full capacity.

4b. Relevant cost