Question

Royal Group Ltd. of Medicine Hat, Alberta, its factory building 20 years ago for several years, company out a small annex attached to the rear of the building. The company has received a rental income of $50,000 per year on this space. The sender’s lease will expire soon, and rather than renew the case, the company has decided to use the space itself to manufactme a new product Direct materials cost for the new product will total $60 per unit. To have a place to store finished units of product, the company Page 19 will rent a small warehouse nearby. The rental cost will be 1.000 per month In addition, the company must rent equipment for use in producing the new product the rental cost will be $ 15.000 per month. Workers will be hired to manufacture the new product with direct labor costs to $80 witThe space in the will continue to be depreciated on line basis, as in prior years. This depreciation is $5,000 per year. Advertising costs for the new product will total 150,000 per year. A supervisor will be hired to oversee production, with a salary of $ 3,500 per month . Electricity for operating machines will be $1.80 per unit. Costs of shipping the new product to customers will be 12 per unit To provide funds to purchase materials, meet payrolls , and so forth the company will have liquid are some temporary is vestments These investments are currently yielding an average return of about $ 5.000 per year. Required: Prepare an answer sheet with the following column headings: Product Cost Name of the Cost Variable Cost Fixed Direct Materials Direct Labour Manufacturing Overhead Period ( Selling and Administrative) Cost Opportunity Cost Sunk Cost Cost

List the different costs associated with the new product decision down the extreme left column (under " Name of the Cost") Then place an X under each heading that helps describe the type of cost involved. There may be Xs under several column headlings for single cost. ( For example , a cost may be a fixed cost, a period cost, and a sunk cost; you would put an X under each of these headings opposite the cost.)

Answer 1

Name of the Cost	Variable Cost	Fixed Cost	Product Cost			Period	Opportunity Cost	Sunk Cost
			Direct Materials	Direct Labor	Mfg. Overhead	(Selling and Admin.) Cost
Rental revenue forgone, $50,000 per year							X
Direct materials cost, $60 per unit	X		X
Supervisor’s salary, $3,500 per month		X			X
Direct labor cost, $80 per unit	X			X
Rental cost of warehouse, $1,000 per month		X				X
Rental cost of equipment, $3,500 per month		X			X
Depreciation of the building, $5,000 per year		X			X			X
Advertising cost, $50,000 per year		X				X
Shipping cost, $12 per unit	X					X
Electrical costs, $1.80 per unit	X				X
Return earned on investments, $5,000 per year							X