In: Accounting
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 4,200 sets per year. Annual cost data at full capacity follow: Direct labor $ 91,000 Advertising $ 102,000 Factory supervision $ 67,000 Property taxes, factory building $ 18,000 Sales commissions $ 60,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 20,000 Indirect materials, factory $ 18,000 Depreciation, factory building $ 104,000 Administrative office supplies (billing) $ 3,000 Administrative office salaries $ 113,000 Direct materials used (wood, bolts, etc.) $ 431,000 Utilities, factory $ 48,000 ________________________________________ 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
Solution:
Part 1 –
Average Product Cost at Full Capacity |
Type of Expense |
$$ |
Direct Materials Used |
Direct Costs |
$431,000 |
Direct labor |
Direct Costs |
$91,000 |
Manufacturing Overhead Cots: |
||
Factory Supervision |
Indirect Manufacturing OH |
$67,000 |
Property taxes, factory building |
Indirect Manufacturing OH |
$18,000 |
Insurance factory |
Indirect Manufacturing OH |
$6,000 |
Lease cost, factory equipment |
Indirect Manufacturing OH |
$20,000 |
Indirect materials, factory |
Indirect Manufacturing OH |
$18,000 |
Depreciation, factory building |
Indirect Manufacturing OH |
$104,000 |
Utilities, factory |
Indirect Manufacturing OH |
$48,000 |
Total Production Cost |
$803,000 |
|
Number of Units Production (Capacity) |
4,200 Sets |
|
Average Product Cost per set |
$191.19 |
Note – Sales commission, depreciation admin office equipment, admin office supplies and admin office salaries are selling and administrative expenses and these are not production cost. Hence no included in product cost.
Part 2 -- 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 ---- Average Product Cost per set will INCREASE
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