Question

The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company is currently operating at 80% of its full capacity of 2,400 sets per quarter. Quarterly cost data at this level of operations follow:

Factory labour, direct	$	120,000
Advertising		50,400
Factory supervision		40,400
Property taxes, factory building		3,900
Sales commissions		82,000
Insurance, factory		2,900
Depreciation, office equipment		4,400
Lease cost, factory equipment		12,400
Indirect materials, factory		6,400
Depreciation, factory building		10,400
General office supplies (billing)		3,400
General office salaries		62,000
Direct materials used (wood, bolts, etc.)		96,000
Utilities, factory		20,400

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. Based on the answers obtained in Requirement (1), compute the average product cost per patio set. (Round your answer to 2 decimal places.)

3. Assume that production increases to only 2,160 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.)

b. Since the company is operating below its full capacity, what cost term used in the chapter might be the most applicable in this situation?

• Opportunity cost

• Sunk cost

• Relevant cost

Please send as soon as possible! Thank you!

Answer 1