Question

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The 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 $89,000Advertising $101,000Factory supervision $66,000Property taxes, factory building $20,000Sales commissions $63,000Insurance, factory $7,000Depreciation, administrative office equipment $3,000Lease cost, factory equipment $15,000Indirect materials, factory $20,000Depreciation, factory building $108,000Administrative office supplies (billing) $5,000Administrative office salaries $111,000Direct materials used (wood, bolts, etc.)$425,000Utilities, factory $40,0001. 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.)2. Compute the average product cost of one patio set.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?

Answer 1

Answer:

1.COST BEHAVIOUR

Variable Fixed

$642,000 $323,000

SELLING OR ADMINISTRATIVE

Cost $283,000

PRODUCT COST

Direct Indirect

$513,000 $276,000

2.$208

3. I would expect the average product cost per set to increase.

Explanation:

1. Calculation for the dollar amount of each cost item

COST BEHAVIOUR

Variable Fixed

Direct labor $89,000 $0

Advertising $0 $101,000

Factory supervision $0 $66,000

Property taxes, factory building$0 $20,000

Sales commissions$63,000 $0

Insurance, factory $0 $7,000

Depreciation, administrative office equipment$0 $3,000

Lease cost, factory equipment$0 $15,000

Indirect materials, factory $20,000 $0

Depreciation, factory building

Administrative office supplies (billing) $5,000 $0

Administrative office salaries $0 $111,000

Direct materials used (wood, bolts, etc.)$425,000 $0

Utilities, factory $40,000 $0

TOTAL COSTS $642,000 $323,000

SELLING OR ADMINISTRATIVE

Cost

Direct labor

Advertising $101,000

Factory supervision

Property taxes, factory building

Sales commissions $63,000

Insurance, factory

Depreciation, administrative office equipment $3,000

Lease cost, factory equipment

Indirect materials, factory

Depreciation, factory building

Administrative office supplies (billing) $5,000

Administrative office salaries$111,000

Direct materials used (wood, bolts, etc.)

Utilities, factory

TOTAL COSTS $283,000

PRODUCT COST

Direct Indirect

Direct labor $89,000 $0

Advertising

Factory supervision $0 $66,000

Property taxes, factory building$0 $20,000

Sales commissions

Insurance, factory $0 $7,000

Depreciation, administrative office equipment

Lease cost, factory equipment$0 $15,000

Indirect materials, factory$0 $20,000

Depreciation, factory building $0 $108,000

Administrative office supplies (billing)

Administrative office salaries

Direct materials used (wood, bolts, etc.)$425,000 $0

Utilities, factory$0 $40,000

TOTAL COSTS $514,000 $276,000

2.Computation of the average product cost of one patio set

Using this formula

Average product cost of one patio set =(Direct costs +Indirect costs)/Capacity set per year

Let plug in the formula

Average product cost of one patio set=($514,000+$276,000)/$3,800

Average product cost of one patio set=$790,000/$3,800

Average product cost of one patio set=$208

Therefore the Average product cost of one patio set will be $208

3. In a situation where the production drops to only 1,000 sets annually, I would expect the average product cost per set to increase.