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 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?

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.