Question

The D Company produces a wood patio furniture set consisting of a table and four chairs. he company has enough customer demand to justify producing its full capacity of 3,800 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 92,000 $101,000 $ 70,000 S 17,000 $ 57,000 S 7,000 $ 3,000 S 18,000 20,000 $110,000 S 4,000 $110,000 $429,000 S 45,000 Direct materials used (wood, bolts, etc.) Utilities, factory Required: 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 pr and sccond, 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.) I. oduced and sold; Period -Selling or Cost Bchavior Administrative Product Cost Cost Item Variable Fixed Cost Direct Indirect Direct labor Advertisin Factory supcrvision Property taxes, factory building Sales commissions Insurancc, 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 2. Compute the average product cost of one patio set at full capacity 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? Why? Average cost per set would be?

Answer 1

Answer

(1)

(Values in $)				Product
Cost Item	Fixed	Variable	Period	Direct	Indirect
Direct labor		92,000		92,000
Advertising	1,01,000		1,01,000
Factory supervision	70,000				70,000
Property tax, factory building	17,000		17,000
Sales commission		57,000	57,000
Insurance, Factory	7,000		7,000
Depreciation, Admin office equipment	3,000		3,000
Lease, Factory equipment	18,000				18,000
Indirect material, Factory		20,000			20,000
Depreciation, Factory building	1,10,000				1,10,000
Admin office supplies	4,000		4,000
Admin office salaries	1,10,000		1,10,000
Direct material used		4,29,000		4,29,000
Utilities, factory	45,000				45,000
TOTAL	4,85,000	5,98,000	2,99,000	5,21,000	2,63,000

(2)

Average product cost = (Direct product cost + Indirect product cost) / Units sold

= $(5,21,000 + 263,000) / 3,800

= $784,000 / 3,800

= $206

(3)

Average product cost will Increase if production falls.

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