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 $ 92,000 Advertising $ 102,000 Factory supervision $ 73,000 Property taxes, factory building $ 18,000 Sales commissions $ 57,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 3,000 Lease cost, factory equipment $ 13,000 Indirect materials, factory $ 16,000 Depreciation, factory building $ 109,000 Administrative office supplies (billing) $ 4,000 Administrative office salaries $ 109,000 Direct materials used (wood, bolts, etc.) $ 430,000 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.

	Amount ($)
Product Costs:
Variable Costs:
- Direct Material	430,000
- Direct Labor	92,000
- Indirect Materials	16,000
- Utilities (Indirect cost)	46,000
Fixed Costs:
- Depreciation, factory building (Indirect cost)	109,000
- Lease cost, factory equipment (Indirect cost)	13,000
- Insurance factory (Indirect cost)	6,000
- Property Taxes, Factory Building (Indirect cost)	18,000
- Factory Supervision (Indirect cost)	73,000
Selling and Administrative Costs:
Variable Costs:
Sales Commission	57,000
Fixed Costs:
- Advertising	102,000
- Depreciation, administrative office equipment	3,000
- Administrative office supplies	4,000
- Administrative Office Salaries	109,000
TOTAL	1,078,000

2. Average product Cost of one patio set:

Total Product Costs = 803,000

Average product cost of one patio set = 803000/4200 = $191.19

Total Costs = $ 1,078,000

Average Total Cost = 1078000/4200 = $ 256.67

3. Annual Production 1,000 sets:

Average Product Cost :

Variable Costs [430000+92000+16000+46000]/4200*1000	$139,048
Fixed Costs	$219,000
Average Product Cost [139048+219000]/1000	$358.05

Hence average product cost has increased.

Total Costs:

Variable Costs [430000+92000+16000+46000+57000]/4200*1000	$152,619
Fixed Costs	$437,000
Average Product Cost [152619+437000]/1000	$589.62

Hence average total cost has increased.