Question

Q.4. The D.C specializes in producing the set of wood patio furniture consisting off a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:

Factory labor, direct                                                              Rs. 118,000

Advertising                                                                                      50,000    

Factory supervision                                                                       40,000

Property taxes, factory building                                                   3,500

Sales commissions                                                                        80,000

Insurance, factory                                                                           2,500

Depreciation, administrative office equipment                         4,000

Lease Cost, factory equipment                                                   12,000

Indirect materials , factory                                                            6,000

Depreciation, factory building                                                    10,000

Administrative office supplies (billing)                                       3,000

Administrative office salaries                                                    60,000

Directs materials used (wood, bolts, etc)                                94,000

Utilities, factory                                                                           20,000

Required:

1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the rupees amount under the appropriate headings. As examples, this has been done already for the first two items in the list above. 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)

Cost item                           Cost Behavior                      Selling or administrative                Product cost              .

                                         Variable            Fixed                        Cost                             Direct                       Indirect*

Factory labor direct     Rs. 116,000                                                                                   Rs. 118,000

Advertising                                            Rs. 50,000                   Rs. 50,000

*To units of product

2. Total the rupee amounts in each of columns in (1) above. 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 ? Explain. No computations are necessary.
4. Refer to the original data. The president’s brother-in-law has considered making him self a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president, if he could purchase a patio set from the D.C “at cost” , and the president agreed to let him do so.

1. Would you expect any disagreement between the two man over the price the brother-in-law should pay? Explain. What price does the president have in mind ? The brother-in-law?

b. Because the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full , regular price to the brother-in-law and still be selling “at cost” ?                                                                                                                              

Answer 1