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 4,200 sets per year. Annual cost data at full capacity follow: Direct labor $ 86,000 Advertising $ 102,000 Factory supervision $ 73,000 Property taxes, factory building $ 20,000 Sales commissions $ 65,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 3,000 Lease cost, factory equipment $ 19,000 Indirect materials, factory $ 20,000 Depreciation, factory building $ 102,000 Administrative office supplies (billing) $ 4,000 Administrative office salaries $ 112,000 Direct materials used (wood, bolts, etc.) $ 434,000 Utilities, factory $ 47,000 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	Fixed	Selling or Administrative cost	Direct	Indirect
Direct labor	86000			86000
Advertising		102000	102000
Factory supervision		73000			73000
Property taxes, factory building		20000			20000
Sales commissions	65000		65000
Insurance, factory		6000			6000
Depreciation, administrative office equipment		3000	3000
Lease cost, factory equipment		19000			19000
Indirect materials, factory	20000				20000
Depreciation, factory building		102000			102000
Administrative office supplies (billing)	4000		4000
Administrative office salaries		112000	112000
Direct materials used (wood, bolts, etc.)	434000			434000
Utilities, factory	47000				47000
Total costs	656000	437000	286000	520000	287000
2
Average product cost = (520000+287000)/4200=	192
3
The average product cost per set would increase if the production drops