Question

The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company has ample orders to keep production going at its full capacity of 2,600 sets per quarter. Quarterly cost data at full capacity follow:

Factory labour, direct	$	121,000
Advertising		50,600
Factory supervision		40,600
Property taxes, factory building		4,100
Sales commissions		83,000
Insurance, factory		3,100
Depreciation, office equipment		4,600
Lease cost, factory equipment		12,600
Indirect materials, factory		6,600
Depreciation, factory building		10,600
General office supplies (billing)		3,600
General office salaries		63,000
Direct materials used (wood, bolts, etc.)		97,000
Utilities, factory		20,600

  

Required:

1.

Enter the dollar amount of each cost item under the appropriate headings. As examples, this has been done already for the first two items in the preceding list. 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 as shown.) 2. Compute the average product cost per patio set. (Round your answer to 2 decimal places.)          3. Assume that production drops to only 1,000 sets quarterly. Would you expect the average product cost per patio set to increase, decrease, or remain unchanged? Increase Decrease Remain unchanged 4. Refer to the original data. The president’s brother-in-law has considered making a patio set and has priced the necessary materials at a building supply store. He has asked the president if he could purchase a patio set from the Mahela Company “at cost,” and the president has agreed to let him do so. a. Would you expect any disagreement over the price the brother-in-law should pay? What price does the president probably have in mind? (Round your answer to 2 decimal places.)

Answer 1

Ans-1

	Cost Behavior		Selling or Administrative	Production Cost
Cost Item	Variable	Fixed	Cost	Direct	Indirect
Factory Labour, direct	$121,000			$121,000
Advertising		$50,600	$50,600
Factory supervision		$40,600			$40,600
Property taxes,factory building		$4,100			$4,100
Sales commisions	$83,000		$83,000
Insurance,factory		$3,100			$3,100
Depreciation, administrative office equipement		$4,600	$4,600
Lease cost,factory equipment		$12,600			$12,600
Indirect materials, factory	$6,600				$6,600
Depreciation, factory building		$10,600			$10,600
General office supplies	$3,600		$3,600
General office salaries		$63,000	$63,000
Direct materials used	$97,000			$97,000
Utilities,factory	$20,600				$20,600
Total costs	$331,800	$189,200	$204,800	$218,000	$98,200

Ans-2 Computation of the average product cost of one patio set:

Costs	Amount
Direct cost	$218,000
Indirect cost	$98,200
Total cost	$316,200
Average production cost-$316,200/2,600 sets= $122 per set

Ans-3- The average production cost will incresae.

Explanation: The average product cost per set would increase if the production drops to 1,000 sets quarterly because if the production reduces,the direct cost in terms with the product reduces but the indirect and fixed costs will remain same. Due to this the same indirect and fixed costs are distributed equally to each product.So, the cost of each product increases.

Ans-4-a- Yes, the president may expect a minimum price of $122, which is the average cost to manufacture one set.He might expect a price even higher than this to cover a portion of the administrative costs. The brother-in-law probably is thinking of cost as including only direct materials or atmost direct materials and direct labor. Direct material alone would be only $37.31 per set ($97,000/2,600 sets) and direct materials and direct labor would be only &83.85 ($218,000/2,600 sets).

Kindly give thumbsup if u like the answer please.....Thanks!!!