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	$	91,000
Advertising	$	96,000
Factory supervision	$	68,000
Property taxes, factory building	$	24,000
Sales commissions	$	57,000
Insurance, factory	$	6,000
Depreciation, administrative office equipment	$	2,000
Lease cost, factory equipment	$	19,000
Indirect materials, factory	$	18,000
Depreciation, factory building	$	102,000
Administrative office supplies (billing)	$	5,000
Administrative office salaries	$	108,000
Direct materials used (wood, bolts, etc.)	$	432,000
Utilities, factory	$	50,000

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 behavior		Selling or administrative	Product cost
	Variable	Fixed	Cost	Direct	Indirect
Direct labor	91000			91000
Advertising		96000	96000
Factory supervision		68000			68000
Property taxes, factory building		24000			24000
Sales commissions	57000		57000
Insurance, factory		6000			6000
Depreciation, administrative office equipment		2000	2000
Lease cost, factory equipment		19000			19000
Indirect materials, factory	18000				18000
Depreciation, factory building		102000			102000
Administrative office supplies (billing)	5000		5000
Administrative office salaries		108000	108000
Direct materials used (wood, bolts, etc.)	432000			432000
Utilities, factory	50000				50000
Total costs	653000	425000	268000	523000	287000
2
Average product cost of one patio set	208	=(523000+287000)/3900
3
Average product cost per set would increase