Question

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 4,000 sets per year. Annual cost data at full capacity follow:

Direct labor	$	94,000
Advertising	$	95,000
Factory supervision	$	68,000
Property taxes, factory building	$	19,000
Sales commissions	$	61,000
Insurance, factory	$	7,000
Depreciation, administrative office equipment	$	1,000
Lease cost, factory equipment	$	11,000
Indirect materials, factory	$	21,000
Depreciation, factory building	$	106,000
Administrative office supplies (billing)	$	6,000
Administrative office salaries	$	115,000
Direct materials used (wood, bolts, etc.)	$	434,000
Utilities, factory	$	42,000

Required:

1. 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 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.) (If your answer is zero, leave the cell blank.)

Cost Behavior Product Cost Period (Selling or Administrative) Cost Cost Item Variable Fixed Direct Indirect ד ייייייייייייייייייייייייייייייייייוווווווווווווווווווווווווווווווווווווווווווווווו 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 Direct materials used (wood, bolts, etc.) Utilities, factory Total costs I T T I I TTIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIT.

2. Compute the average product cost of one patio set. (Round your answer to nearest whole dollar.)

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?

	Increase
	Decrease
	Remain unchanged

Answer 1

1
	Cost behavior		Selling or administrative	Product cost
	Variable	Fixed	Cost	Direct	Indirect
Direct labor	94000			94000
Advertising		95000	95000
Factory supervision		68000			68000
Property taxes, factory building		19000			19000
Sales commissions	61000		61000
Insurance, factory		7000			7000
Depreciation, administrative office equipment		1000	1000
Lease cost, factory equipment		11000			11000
Indirect materials, factory	21000				21000
Depreciation, factory building		106000			106000
Administrative office supplies (billing)	6000		6000
Administrative office salaries		115000	115000
Direct materials used (wood, bolts, etc.)	434000			434000
Utilities, factory	42000				42000
Total costs	658000	422000	278000	528000	274000
2
Average product cost of one patio set	201	=(528000+274000)/4000
3
Average product cost per set would increase