Question

Between the alternatives of going into business to make the device or not going into business to make the device.

02. Dubai Penguin Company acquired its factory building about 20 years ago. For a number of years the company has rented out a small, unused part of the building. The renter's lease will expire soon. Rather than renewing the lease, Dubai Penguin Company is considering using the space itself to manufacture a new product. Under this option, the unused space will continue to be depreciated on a straight-line basis, as in past years.

Direct materials and direct labor cost for the new product would be 200dhs per unit. In order to have a place to store finished units of the new product, the company would have to rent a small warehouse nearby. The rental cost would be 8,000dhs per month. It would cost the company an additional 16,000dhs each month to advertise the new product. A new production supervisor would be hired to oversee production of the new product who would be paid 12,000dhs per month. The company would pay a sales commission of 40dhs for each unit of product that is sold.

Required:

Complete the chart below by placing an "X" under each column heading that helps to identify the costs listed to the left. There can be "X's" placed under more than one heading for a single cost. For example, a cost might be a fixed cost, an opportunity cost, and a sunk cost; there would be an "X" placed under each of these headings on the answer sheet opposite the cost.

Differential Cost *

Fixed Cost

Opportunity Cost

Direct Cost

Admin & Sales Cost

Sunk Cost

Variable Cost

Rent On Unused Factory Space

x

x

Depreciation On The Factory Space

x

x

x

Direct Materials And Direct Labour

x

x

x

Rent For Small Warehouse

x

x

x

Production Supervisor’s Salary

x

x

x

Advertising

x

x

x

Sales Commissions

x

x

x

*Between the alternatives of (1) renting the space out again or (2) using the space to produce the new product.

Answer 1