Question

The Dorilane Company produces a set of wood patio furniture consisting of a table and four...

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 4,000 sets per year. Annual cost data at full capacity follow: Direct labor $ 91,000 Advertising $ 100,000 Factory supervision $ 70,000 Property taxes, factory building $ 17,000 Sales commissions $ 57,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 11,000 Indirect materials, factory $ 18,000 Depreciation, factory building $ 105,000 Administrative office supplies (billing) $ 6,000 Administrative office salaries $ 110,000 Direct materials used (wood, bolts, etc.) $ 429,000 Utilities, factory $ 43,000 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.) 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?

Homework Answers

Answer #1

1.

Cost Item Variable Cost Fixed Cost Selling and Administrative Cost Product Cost
Direct Indirect
Direct labor 91000 91000
Advertising 100000 100000
Factory supervision 70000 70000
Property taxes, factory building 17000 17000
Sales commissions 57000 57000
Insurance, factory 6000 6000
Depreciation, administrative office equipment 2000 2000
Lease cost, factory equipment 11000 11000
Indirect materials, factory 18000 18000
Depreciation, factory building 105000 105000
Administrative office supplies (billing) 6000 6000
Administrative office salaries 110000 110000
Direct materials used (wood, bolts, etc) 429000 429000
Utilities, factory 43000 43000
Total costs 644000 421000 275000 520000 270000

2. Average product cost of one patio set: $197.50

Product Cost
Direct 520000
Indirect 270000
Total $ 790000
Number of sets produced 4000
Average cost per set $ ($790000/4000) 197.50

3. Increase

With a drop in production from 4000 sets to 1000 sets, the variable cost per set will remain unchanged however, the fixed cost per set will increase as the total fixed cost which remains constant is spread over a lesser number of sets. Hence, the average product cost per set will increase due to the increase in the fixed costs per set.

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