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 3,800 sets per year. Annual cost data at full capacity follow:

Direct labor	$	89,000
Advertising	$	101,000
Factory supervision	$	66,000
Property taxes, factory building	$	20,000
Sales commissions	$	63,000
Insurance, factory	$	7,000
Depreciation, administrative office equipment	$	3,000
Lease cost, factory equipment	$	15,000
Indirect materials, factory	$	20,000
Depreciation, factory building	$	108,000
Administrative office supplies (billing)	$	5,000
Administrative office salaries	$	111,000
Direct materials used (wood, bolts, etc.)	$	425,000
Utilities, factory	$	40,000

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

Answer- 1:

	Nature of Cost		Product Cost		Selling & Administrative Cost
	Variable	Fixed	Direct	Indirect
Direct Labour	89000		89000
Advertising		101000			101000
Factory Supervision		66000		66000
Property Taxes- factory building		20000		20000
Sales Commission	63000				63000
Insurance Factory		7000		7000
Depreciation - Office Equipment		3000			3000
Lease Cost- Factory Equipment		15000		15000
Indirect Material- factory	20000			20000
Depreciation- Factory Building		108000		108000
Administrative Supplies	5000				5000
Administrative Salaries		111000			111000
Direct Materials	425000		425000
Utilities Factory	40000			40000
TOTAL COSTS	642000	431000	514000	276000	283000

Answer- 2:

   Average Product Cost = (514000 + 276000) / 3800 = $207.89

Answer- 3:

If the production drops from 3800 units to 1000 units, then the average product cost would decrease, because fixed costs that remains constant irrespective of activity level will be allocated to fewer units.

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