Question

The Dorilane Company specializes in producing a set of wood patio furniture consisting of 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 3,900 sets per year. Annual cost data at full capacity follow:

Direct labor	$	89,000
Advertising	$	102,000
Factory supervision	$	66,000
Property taxes, factory building	$	19,000
Sales commissions	$	63,000
Insurance, factory	$	5,000
Depreciation, administrative office equipment	$	1,000
Lease cost, factory equipment	$	12,000
Indirect materials, factory	$	19,000
Depreciation, factory building	$	101,000
Administrative office supplies (billing)	$	4,000
Administrative office salaries	$	109,000
Direct materials used (wood, bolts, etc.)	$	428,000
Utilities, factory	$	48,000

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. (Round your answer to nearest whole dollar.)

       

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?
	Increase Decrease Remain unchanged

Answer 1

1.

Cost Item	Cost Behavior	Selling/Administrative	Product Cost
	Variable	Fixed	Cost	Direct	Indirect
Direct Labor	89,000.00			89,000.00
Advertising		102,000.00	102,000.00
Factory supervision		66,000.00			66,000.00
Property taxes, factory building		19,000.00			19,000.00
Sales commissions	63,000.00		63,000.00
Insurance, factory		5,000.00			5,000.00
Depreciation, administrative office equipment		1,000.00	1,000.00
Lease cost, factory equipment		12,000.00			12,000.00
Indirect materials, factory	19,000.00				19,000.00
Depreciation, factory building		101,000.00			101,000.00
Administrative office supplies (billing)	4,000.00		4,000.00
Administrative office salaries		109,000.00	109,000.00
Direct materials used (wood, bolts, etc.)	428,000.00			428,000.00
Utilities, factory	48,000.00				48,000.00
Total Cost	651,000.00	415,000.00	279,000.00	517,000.00	270,000.00

2.

Average Product Cost for One Patio Set = (517,000+ 270,000)/3,900

=201.79

3. It will Increase