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	$	86,000
Advertising	$	104,000
Factory supervision	$	70,000
Property taxes, factory building	$	16,000
Sales commissions	$	63,000
Insurance, factory	$	7,000
Depreciation, administrative office equipment	$	2,000
Lease cost, factory equipment	$	16,000
Indirect materials, factory	$	21,000
Depreciation, factory building	$	103,000
Administrative office supplies (billing)	$	4,000
Administrative office salaries	$	107,000
Direct materials used (wood, bolts, etc.)	$	428,000
Utilities, factory	$	46,000

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 behaviour	Selling or administrative cost	Product cost
	Cost item					Variable	Fixed	Direct	Indirect
	Direct labor					86,000			86,000
	Advertising						104,000	104,000
	Factory supervision						70,000			70,000
	Property taxes, factory building						16,000			16,000
	Sales commissions					63,000		63,000
	Insurance, factory						7,000			7,000
	Depreciation, administrative office equipment						2,000	2,000
	Lease cost, factory equipment						16,000			16,000
	Indirect materials, factory					21,000				21,000
	Depreciation, factory building						103,000			103,000
	Administrative office supplies (billing)					4,000		4,000
	Administrative office salaries						107,000	107,000
	Direct materials used (wood, bolts, etc.)					428,000			428,000
	Utilities, factory					46,000				46,000
	Total					648,000	425,000	280,000	514,000	279,000
2	Average product cost=Total product cost/Number of sets=(514000+279000)/3900=$ 203 per set
3	Average product cost per set to increase since the fixed cost remains at the same level even if there is a decrease in sets produced