Question

The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company has ample orders to keep production going at its full capacity of 2,000 sets per quarter. Quarterly cost data at full capacity follow: Factory labour, directly related to production Advertising Salary of factory manager (supervision) Property taxes on the factory building Sales commission (paid as % of sales) Insurance on factory building and equipment Depreciation on office equipment in head office Lease cost on factory equipment Indirect materials used in production in factory Depreciation of factory building General office supplies that varies with usage General quarterly office salaries Direct materials used in production (wood, bolts, etc.) Utilities in factory that varies with production $168,000 50,000 45,000 4,600 80,000 3,500 14,000 6,000 6,000 8,000 4,000 50,000 115,000 30,000

Answer 1

Production 2,000 units
Cost Item	Cost Behaviour	Period Cost	Product Cost
	Variable	Fixed	Total	Selling/Admin	Direct	Indirect	Total
Factory Labour directly related to production	168,000		168,000		168,000		168,000
Advertising		50,000	50,000	50,000			0
Salary of Factory Manager Supervision		45,000	45,000			45,000	45,000
Property Taxes on Factory Building		4,600	4,600			4,600	4,600
Sales Commision paid as % of sales	80,000		80,000	80,000			0
Insurance on Factory Building & Equipment		3,500	3,500			3,500	3,500
Depreciation on Office Equipment in HO		14,000	14,000	14,000			0
Lease Cost on Factory Equipment		6,000	6,000			6,000	6,000
Indirect materials used in production in factory		6,000	6,000			6,000	6,000
Depreciation of Factory Building		8,000	8,000			8,000	8,000
General Office Supplies that varies with usage		4,000	4,000	4,000			0
General Quarterly Office Salaries		50,000	50,000	50,000			0
Direct Materials used in Production ( wood, bolts, etc. )	115,000		115,000		115,000		115,000
Utilities in factory that varies with production	30,000		30,000		30,000		30,000
Total Cost	393,000	191,100	584,100	198,000	313,000	73,100	386,100
Product Cost per unit					157	37	193
When Production is 1000 units
Total Product Cost					156,500	73,100	229,600
Product Cost per unit					157	73	230
Increase in Product Cost on reduction in production							37
The average product cost has increased due to reductuion in production.
The President can accept the offer of his brother in law if the selling price covers the increase in the cost i.e. $ 37,000 ( 1,000 * 37 )