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 3,900 sets per year. Annual cost data at full capacity follow:

Direct labor $90,000 Advertising $104,000 Factory supervision $ 72,000 Property taxes, factory building $ 21,000 Sales commissions $ 57,000 Insurance, factory $ 7,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 15,000 Indirect materials, factory $ 17,000 Depreciation, factory building $ 101,000 Administrative office supplies (billing) $ 4,000 Administrative office salaries $ 107,000 Direct materials used (wood, bolts, etc.) $ 431,000 Utilities, factory $ 44,000

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

VARIABLE
PRODUCT
DIRECT
Direct labor	90000
Direct materials used (wood, bolts, etc.)	431000
INDIRECT
Indirect materials, factory	17000
Factory supervision	72000
SELLING AND ADMIN
Advertising	104000
Sales commissions	57000
Administrative office supplies (billing)	4000
Administrative office salaries	107000
FIXED
SELLING AND ADMIN
Insurance, factory	7000
Depreciation, administrative office equipment	2000
Lease cost, factory equipment	15000
Depreciation, factory building	101000
PRODUCT
INDIRECT
Utilities, factory	44000
Property taxes, factory building	21000
TOTAL COST	1072000
NO. OF PATIO SET	3900
COST OF ONE PATIO	274.871

WHEN NO. OF PATIO SETS DECREASED TO 1000
NO. OF PATIO SETS	1000
TOTAL COST	1072000
COST OF ONE PATIO SET	1072

when number of patio sets are decreased, cost per patio set increases