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 2,300 sets per quarter. Quarterly cost data at this level of operations follow:

Factory labour, direct	$	119,500
Advertising		50,300
Factory supervision		40,300
Property taxes, factory building		3,800
Sales commissions		81,500
Insurance, factory		2,800
Depreciation, office equipment		4,300
Lease cost, factory equipment		12,300
Indirect materials, factory		6,300
Depreciation, factory building		10,300
General office supplies (billing)		3,300
General office salaries		61,500
Direct materials used (wood, bolts, etc.)		95,500
Utilities, factory		20,300

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.)

2. Based on the answers obtained in Requirement (1), compute the average product cost per patio set. (Round your answer to 2 decimal places.)

3. Assume that production increases to only 2,070 sets quarterly. Would you expect the average product cost per patio set to increase, decrease, or remain unchanged?

• Increase

• Decrease

• Remain unchanged

4. Refer to the original data. The president’s brother-in-law has considered making a patio set and has priced the necessary materials at a building supply store. He has asked the president if he could purchase a patio set from the Mahela Company “at cost,” and the president has agreed to let him do so.

a. Would you expect any disagreement over the price the brother-in-law should pay? What price does the president probably have in mind? (Round your answer to 2 decimal places.)

b. Since the company is operating below its full capacity, what cost term used in the chapter might be the most applicable in this situation?

• Opportunity cost

• Sunk cost

• Relevant cost

  3 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.) Cost Bohaviour Selling and Administrative Variable Fixed Cost $ 119,500 50,300 50,300 Product Cost Direct Indirect 119,500 15 points S X 01:06:11 Cost Item Factory labour, direct Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, office equipment Lease cost, factory equipment Indirucl materials, factory Depreciation, factory building General office supplies (billing) General office salaries Direct materials used (wood, bolts, etc.) Utilities, factory Total costs *To units of product. $ 119,500 $ 50,300 $ $ 50,300 S 119.500 S 0 2. Based on the answers obtained in Requirement (1), compute the average product cost per patio set. (Round your answer to 2 decimal places.)

Answer 1

Part 1

			Selling or
	Cost	behavior	administrative	Product	cost
	Variable	Fixed	Cost	Direct	Indirect
Factory labor Direct	119,500			119,500
Advertising		50,300	50,300
Factory supervision		40,300			40,300
Property taxes, factory building		3,800			3,800
Sales commissions	81,500		81,500
Insurance, factory		2,800			2,800
Depreciation, office equipment		4,300	4,300
Lease cost, factory equipment		12,300			12,300
Indirect materials, factory	6,300				6,300
Depreciation, factory building		10,300			10,300
General office supplies (billing)	3,300		3,300
General office salaries		61,500	61,500
Direct materials used (wood, bolts, etc.)	95,500			95,500
Utilities, factory	20,300				20,300
Total costs	326,400	185,600	200,900	215,000	96,100

Part 2

The average product cost for one patio set would be:

Direct costs	215,000
Indirect costs	96,100
Total costs	311,100
Total number of sets	1,840
Average product cost per patio set	169.08

Therefore,

Average product cost

$169.08

per patio set

Part 3

Answer is option A Decrease

Due to dropping increases to 2,070 units, there would be decrease in average product cost per set because the fixed costs would be spread among more number of units and thus there will be decrease in average cost.

Part 4

Yes,

the president may expect a minimum price of

$169.08

• Opportunity cost